Stocks to Consider if FIIs Shift Focus from India to China

One in every five electric vehicles (EVs) on Indian roads is produced by a Chinese company. This trend is not unique to India, as globally, China is responsible for six out of every 10 EVs sold. China’s commanding lead in the EV industry can be attributed to its extensive global supply chains. Chinese manufacturers benefit not only from access to critical raw materials and technology but also from significant government subsidies designed to foster a thriving EV ecosystem within the country.

Foreign investors are drawn to more than just China’s automotive sector. The country’s substantial investments in electronics and its robust supply chain in this field are also attractive. Consequently, foreign institutional investors (FIIs) may shift their attention back to Chinese markets if Indian equities become too expensive.

In other words, a “Buy China – Sell India” approach for FIIs could soon be on the table.

Indeed, in the past two weeks, China’s Shanghai stock market surged nearly 30% from its September lows. This uptick follows concerted efforts by the Chinese government to stimulate economic growth. Only a short while ago, multinational corporations were pulling capital out of China at unprecedented rates, and economic forecasts for the country were being downgraded.

So, is the dark cloud over China’s economy finally clearing? Will global investors once again vie for a share of China’s growth story?

Despite recent developments, the underlying challenges within China’s economy remain. China is grappling with significant issues like unfinished housing projects and mounting bad debt. Furthermore, there is growing skepticism regarding the transparency of the data emerging from China, with the government accused of manipulating economic statistics and concealing vital information.

Over the past few years, China’s monetary stimulus measures have become more politically motivated than economically sound. The country’s largest banks keep their annual reports and financial documents closely guarded, with little visibility granted to the international media. Foreign journalists often find themselves under scrutiny, treated as potential threats. Even successful entrepreneurs, such as Alibaba’s Jack Ma, face tight governmental control, complicating the allocation of capital within the country.

China is confronting these issues at a time when its labor force is shrinking and productivity in manufacturing is on the decline. The country must shift its focus from an economy reliant on cheap credit and construction toward more innovative industries.

This is why investor capital is now flowing into sectors like electric vehicles, semiconductors, and artificial intelligence (AI). However, if these investments are predicated on the expectation of a sustainable economic boom, investors could be in for more unpleasant surprises.

One key example of this is China’s struggling real estate market. The country is left with tens of millions of vacant housing units, a product of overbuilding. This excess housing is now clashing with a declining population, leaving cities burdened with properties that may never be occupied.

According to The Economist, China may have as many as 90 million empty housing units. If each unit housed three people, this would be enough to accommodate the entire population of Brazil.

Another indication of China’s economic imbalance is its credit market bubble. Harvard professor Kenneth Rogoff has highlighted that housing now represents one-third of the Chinese economy, exposing it to significant risks. Over the past decade, private sector credit in China has surged by around 100% of its GDP, a rate of expansion greater than the credit growth that preceded Japan’s economic stagnation in the 1990s and the U.S. subprime mortgage crisis of 2008.

China’s dependence on state-funded investments further complicates its economic picture. State investment accounts for around 42% of the country’s GDP, nearly double the rate seen in more advanced economies. As a result, China now faces the problem of excess manufacturing capacity. With domestic consumption unable to fully absorb this surplus, China must rely on foreign markets to offload its manufactured goods.

Without significant reductions in debt and reining in investment, China risks experiencing a prolonged period of economic stagnation, similar to Japan’s “lost decade.” Such an outcome would have far-reaching consequences for the global economy, given China’s role as the world’s second-largest economy and its status as the largest consumer of many international commodities.

FIIs have much to consider before adopting a “Buy China – Sell India” strategy. However, in the short term, this approach may seem attractive, especially if Indian stock market valuations remain elevated.

A significant correction in Indian markets could only occur if the outflow of foreign capital exceeds the inflow from domestic investors.

For those who believe in the long-term growth potential of the Indian economy, the following types of stocks could be worth considering:

• Companies with asset-light balance sheets and a consistent track record of delivering returns to shareholders.

• Firms poised to benefit from regulatory, policy, or demographic shifts that will drive substantial profitability.

• Cash-rich companies that have regularly shared profits with minority shareholders.

• Businesses that exhibit resilience in the face of economic and geopolitical disruptions.