That China-India Rotation Went Precisely Nowhere
Global institutional investors’ tactical rotation from India into Chinese equities in October 2024 has proven to be an exercise in perfectly mistimed market positioning, with both markets subsequently declining by approximately 10% in US dollar terms.
The investment thesis supporting Chinese equity exposure has deteriorated on multiple fronts. Most significantly, the National People’s Congress stimulus package, initially anticipated to provide meaningful economic support, has instead manifested primarily as a debt-management exercise. The announced Rmb10tn ($1.4 trillion) fiscal plan fundamentally represents a debt swap for local government off-balance sheet liabilities, yielding merely Rmb600bn, or 0.1% of annual GDP, in savings over five years.
Monetary conditions remain notably restrictive, with real interest rates sustained at +2.8% compared to -1.25% during previous stimulus cycles in 2008 and 2020. This monetary restraint appears driven by policymakers’ preference for currency stability, deemed essential for renminbi internationalization initiatives with BRICS+ trading partners.
The timing of these policy limitations has proven particularly unfortunate given China’s increasing dependence on exports, which have emerged as the largest single contributor to GDP growth. This development coincides with the prospect of significantly adverse trade policy under a potential second Trump administration, which has proposed tariffs of up to 60% on Chinese imports.
Concurrent with these developments, India has experienced substantial foreign investor outflows totaling $14.2 billion since October, creating what CLSA describes as precisely the buying opportunity many institutional investors had expressed interest in exploiting. The particular irony inherent in this situation is magnified by India’s relative insulation from potential adverse US trade policy, a factor that arguably should have influenced October’s tactical allocation decisions.
Indian systematic investment plan contributions reached a record Rs253 billion ($3 billion) in October, while Chinese domestic investor confidence remains subdued despite various policy initiatives designed to stimulate market participation.
CLSA has now reversed its tactical allocation recommendation, returning to a benchmark weighting on Chinese equities while maintaining a 20% overweight position in India. This adjustment appears supported by quantitative analysis suggesting India offers 13% upside potential over the next twelve months, based on their econometric regression model which has historically explained approximately 80% of monthly index movements.
The primary risk to the Indian equity market appears to be excessive primary issuance, with cumulative 12-month issuance reaching 1.5% of market capitalization, a level historically associated with market peaks.