The global stock market landscape has been shifting in 2025, with China emerging as a short-term winner and India facing challenges due to foreign institutional investor (FII) outflows. Over the past few months, China’s stock market has gained significant momentum, while India’s once-favored equities have witnessed a sharp sell-off. However, many experts believe this is a temporary shift, and India’s long-term growth prospects remain strong.
This blog explores the key factors driving the India vs. China investment debate, analyzing why FIIs are favoring China over India in the short term, and what lies ahead for both markets.
Recent Market Trends: China Outperforms India
India’s Stock Market Struggles
- Sensex and Nifty have fallen by 5% in 2025 so far, mainly due to heavy FII outflows.
- India’s market capitalization has dropped by over $1 trillion since October 2024, reflecting weak sentiment.
- Foreign investors now hold only 16% of Indian stocks (a decade-low), yet their holdings still amount to $782 billion.
- Valuations remain high, with MSCI India trading at 21x earnings, above historical averages.
China’s Strong Market Rebound
- CSI 300 and Shanghai Composite are up 4% YTD in 2025, supported by optimism around AI and undervaluation.
- China’s Hang Seng Index surged 16% in one month, while Nifty declined over 2%.
- China has gained $2 trillion in market capitalization since October 2024, while India has lost $1 trillion.
- DeepSeek AI and other tech advancements have fueled the Chinese market rally, attracting global investors.
This sharp contrast in performance has led FIIs to shift their allocations from India to China, at least in the short term.
Why Are FIIs Selling Indian Stocks?
Rising US Treasury Yields and a Strong Dollar
- Higher US treasury yields make American assets more attractive, leading to capital outflows from emerging markets like India.
- A stronger US dollar has further pressured Indian stocks, as FIIs move money into dollar-based assets.
China’s Valuation Advantage
- China’s MSCI Index trades at only 11x price-to-earnings (P/E) ratio, compared to India’s 21x, making it a more attractive option.
- Investors seeking cheaper, high-growth stocks are finding better deals in China than in India.
Economic Slowdown and Earnings Downgrades
- India’s GDP growth has slowed from 7%+ to around 6.5%, leading to weaker corporate earnings.
- Liquidity constraints in the banking sector, potential US tariffs, and a depreciating rupee are adding pressure.
Global Uncertainty and Trump’s “America First” Policy
- The threat of new US tariffs on India has created uncertainty for investors.
- Trump’s trade policies have triggered capital outflows from emerging markets, impacting India more than China.
China’s Market Rebound: Why Are Investors Returning?
AI and Semiconductor Boom
- China’s DeepSeek AI breakthrough has boosted tech stocks, attracting fresh investments.
- The Hang Seng Tech Index jumped 5% in just one week, reinforcing the positive momentum.
Government Stimulus and Regulatory Easing
- The People’s Bank of China (PBOC) has injected liquidity into the market to stabilize the economy.
- The Chinese government has reduced regulatory pressure on major companies, leading to a surge in tech and internet stocks.
Strong Market Performance
- China’s GDP growth for Q4 2024 came in higher than expected at 5.4%, boosting investor confidence.
- Foreign investors bought $2.9 billion worth of Hong Kong stocks in a single day (biggest since 2021).
- The HSBC Hang Seng Tech ETF rose 69% over the past year and 25% in 2025 alone.
With all these positive catalysts, China is currently outperforming India in the short term.
Is the ‘Sell India, Buy China’ Trend Permanent?
India’s Long-Term Strengths
Despite the recent underperformance, India remains a structurally strong investment destination:
- Young and growing population: India has a demographic advantage over China, which is struggling with an aging population.
- Expanding middle class: Rising income levels will continue to drive consumer spending and economic growth.
- Government initiatives like Make-in-India and the PLI scheme are expected to support manufacturing and industrial growth.
FII Flows May Reverse Later in 2025
- Brokerages remain positive on India’s long-term outlook:
- Citi targets Nifty at 26,000 by December 2025.
- Nomura sees a 5% upside, with Nifty expected to reach 23,784.
- If the US Dollar Index falls to 104, FIIs may return to India in the second half of 2025.
China’s Risks and Market Volatility
- US-China tensions could escalate, impacting China’s rally.
- China’s long-term economic challenges (high debt, weak consumer confidence) remain unresolved.
- The rally in Chinese stocks relies heavily on government intervention, which may not be sustainable.
Investment Strategies: What Should Investors Do?
For Short-Term Investors
- China’s market still has momentum, so short-term traders may consider:
- KraneShares CSI China Internet ETF (KWEB, 0.7%) for exposure to tech stocks.
- HSBC Hang Seng Tech ETF (HSTC) for AI and semiconductor growth.
For Short-Term Investors
- India’s current weakness could be an opportunity to buy at lower valuations.
- Investors can consider:
- iShares MSCI India ETF (INDA, 0.62%)
- Invesco India ETF (PIN, 0.78%) for long-term exposure.
Diversification is Key
- Balancing exposure to both India and China may help manage risk.
- Keeping an eye on global interest rates, US trade policies, and China’s stimulus measures will be crucial.
India vs. China – Who Wins?
The recent market trends indicate that China is currently attracting more foreign investment due to cheaper valuations, government stimulus, and AI-driven optimism. However, India’s long-term growth story remains strong, and the current correction may present a buying opportunity for patient investors.
While China may outperform India in the short term, the structural advantages of the Indian economy make it a compelling investment destination for the long run.
Investors should consider a balanced approach, monitoring macroeconomic developments and diversifying their portfolios across both markets.
FAQs:
FIIs are withdrawing from India due to higher US treasury yields, a strong US dollar, and expensive stock valuations. Meanwhile, China’s market offers cheaper valuations, government stimulus, and AI-driven optimism, making it more attractive in the short term.
No, many analysts believe this trend is temporary. While China is benefiting from short-term factors like DeepSeek AI growth and liquidity injections, India’s strong demographic advantage, expanding middle class, and government initiatives will likely drive long-term growth.
The term “Multibagger” was popularized by investor Peter Lynch in his book One Up on Wall Street, where he described stocks that could provide multiple times higher returns.
Despite recent declines, India’s market is expected to recover as economic growth stabilizes. Leading brokerages, like Citi and Nomura, predict a 5% upside, with Nifty reaching 26,000 by December 2025. If the US dollar weakens, FIIs may return to India in the second half of the year.
A diversified approach is best. Short-term investors may find opportunities in China’s tech and AI stocks, while long-term investors can look at India’s structural growth story. Balancing exposure between both markets can help manage risks and maximize returns.
