India’s Market Beats China’s

India’s equity market has been outperforming China’s market by a big margin in recent years. In the last five years, iShares S&P India 50 were up 45.87%, beating China’s comparable ETF by almost two to one – see table.

Index/Fund
2-year Performance
5-year Performance

IShares China (FXI)
20.50%
24.87%

iShares S&P India 50 (INDY)
26.77%
45.87%

iShares MSCI Emerging Markets (EEM)

 
32.64%
12.52%

Source: Finance.yahoo.com  10/21/2017

That may come as a big surprise to some. China is the world’s largest emerging economy, beating India in many economic and financial metrics, including World Forum’s Global Competitiveness — where China occupies the 27th and India the 40th position—see tables.

Apparently, China has been doing a lot of things right. That’s why it is suggested as a model for India.

But India is beating China in one metric that matters the most to emerging market investing: financial market development. India ranks 42, while China ranks 48.

That’s the second year, India beats China in this key metric.

India’s And China’s Competitive Performance 2017-18

Country
China
India

Overall
27
40

Institutions
41
39

Infrastructure
46
66

Macroeconomic environment
17
80

Health and primary education
40
91

Higher Education and Training
47
75

Goods market efficiency
46
56

Labor market efficiency
38
70

Financial market development
48
42

Technological readiness
73
107

Market size
1
3

Business Sophistication
33
39

Innovation
28
29

Source: World Competitiveness Index, World Economic Forum.

India’s And China’s Competitive Performance 2016-17

Country
China
India

Overall
28
39

Institutions
45
42

Infrastructure
42
68

Macroeconomic environment
8
75

Health and primary education
41
85

Higher Education and Training
54
81

Goods market efficiency
56
60

Labor market efficiency
39
84

Financial market development
56
38

Technological readiness
74
110

Market size
1
3

Business Sophistication
34
35

Innovation
30
29

Source: World Competitiveness Index, World Economic Forum.

Financial development is the 8th pillar in The Global Competitiveness Index, and includes several sub-metrics that describe the soundness of a country’s financial sector. Like domestic credit to private sector, financing of SMEs, corporate bond issuance, financing through equity markets, market capitalization of listed companies, soundness of banks, bank non-performing loans, and regulation of security exchanges.

Financial development is important for several reasons. One of them is that poor financial development accommodates uncontrolled credit growth, which fuels financial bubbles and economic crises.

That seems already to be the case in China. In report the Bank for International Settlements (BIS), pointed to the rapid rise of China’s credit-to-GDP ratio, which now stands at 30.1, three times the threshold of 10 that indicates an impending financial crisis. Moody’s and S&P Global have raised similar concerns recently, lowering China’s credit rating.

Another is that the financial system is the Achilles heel of emerging market economies — the sector where economic crises arise, and the reason equity market rallies end and bear markets begin.

In fact, it was government’s heavy-handed intervention in financial markets that ended recent rallies in Chinese equities. And things can turn worse, when China’s multiple bubbles burst.
Source: Forbes

Source.