Chinese Equities Surge: Should You Invest?

The article explores the factors driving China’s rally, its divergence from Indian markets, and whether mutual funds and ETFs provide a viable entry point into this high-growth, yet high-risk market [EasyDNNnews:PaidContentStart]

China’s dramatic stock market recovery has reaffirmed its significance for global investors. Over the past year, the Hang Seng Index has surged nearly 45 per cent, while the Hang Seng Tech Index has soared 66 per cent. Foreign investors, previously wary due to regulatory uncertainties and economic slowdown, are making a strong comeback. Elara Securities’ Global Liquidity Tracker reported that foreign fund inflows into China reached $1.2 billion in the third week of March 2025—the highest since Beijing’s quantitative easing in October 2024.

This marks a clear shift in sentiment, with emerging market fund managers steadily increasing exposure after months of hesitation. The contrast with India’s markets is striking. Despite a sharp 1,500-point rally in the Nifty over the lows of March, the year-to-date returns remain lacklustre—down 0.7 per cent for the Sensex and 0.4 per cent for the Nifty as of March 24, 2025. Meanwhile, the Hang Seng index has surged over 19 per cent year-to-date, reaching three-year highs. Some of the Indian ace investors are quite vocal about the Chinese equity market and how they have allocated 2-3 per cent of their capital to Chinese stocks.

According to them, this is a “new story” unfolding with promising growth potential. For investors, China’s appeal lies in lower valuations, strong policy support, and a rebounding economy. However, risks persist—geopolitical tensions, regulatory shifts, and market volatility remain the key concerns. Direct investment in Chinese stocks can also be complex due to taxation and currency conversion issues. Indian investors, however, can gain exposure through China-focused mutual funds and ETFs, offering a structured and simpler route. The key question remains: Should Indian investors take the plunge?

Why China Still Matters
Love it or hate it, China, the world’s second-largest economy, cannot be ignored. It remains a dominant player in global trade, technology, and the financial markets. Even for those who avoid investing in Chinese equities, the country’s economic fate still impacts their portfolios. China’s growth, or lack thereof, ripples across the commodity markets, supply chains, and even the profitability of Indian businesses. However, the past few years have seen a turbulent ride for the Chinese economy. The 2021 property crisis, ongoing deflationary concerns, and sluggish consumer demand have raised serious doubts about China’s growth trajectory.

Unlike the U.S. and Europe, which rebounded strongly in the post-pandemic period, China has struggled to regain its footing, prompting fears of long-term stagnation. Despite these headwinds, the Chinese government has been proactive in stabilising its economy. The People’s Bank of China has slashed interest rates, eased property purchase restrictions, and injected liquidity to boost growth. The state has also provided cash handouts to unemployed youth and pledged further fiscal spending to revive its struggling real estate market.

These efforts appear to be yielding results, with China’s GDP growing by a higher-than-expected 5.4 per cent in the last quarter. Investor sentiment is also shifting. The Hang Seng Tech Index has gained significant traction, fuelled by optimism surrounding artificial intelligence (AI) advancements and the resurgence of major players like Alibaba and Tencent. Even foreign institutional investors, who had been withdrawing from China due to regulatory crackdowns, are now cautiously returning, attracted by historically low valuations. China’s progress in AI, particularly with its DeepSeek model, has further triggered confidence in its technology sector.

A notable development on the geopolitical front can be traced to Indian Prime Minister Narendra Modi’s recent remarks on improving India-China relations. While tensions have existed for years, Modi’s assertion that normalcy has returned to the border areas hints at a possible thaw in diplomatic relations. As India and China look to reboot ties, building upon a spell of relative calm in the border areas, they held another round of diplomatic talks in a ‘positive and constructive’ atmosphere, seeking ways to advance effective border management. This, in turn, could open new economic opportunities between the two countries.

How Does China Compare to India?
China’s stock market sharp rebound, driven by government stimulus and improved investor sentiment, has renewed interest in Chinese equities. However, a closer look at the long-term returns tells a different story. The table below represents benchmark CAGR returns in percentile across various periods:

Note:
■ Shanghai Composite Index (SSE Composite): Tracks all stocks listed on the Shanghai Stock Exchange (Mainland China).
■ Hang Seng Index (HSI): Represents the 50 largest companies listed on the Hong Kong Stock Exchange (HKEX).

While the short-term performance suggests a Chinese comeback, the longer-term picture highlights India’s resilience. Over 3, 5, 10, and even 20 years, Indian equities have consistently delivered higher returns. The Nifty and Sensex have outperformed due to stable corporate earnings, robust domestic demand, and a predictable policy environment. China’s markets have been more volatile, struggling with regulatory crackdowns, a slowing economy, and external trade pressures. Despite recent gains, its long-term returns remain lacklustre. The Hang Seng Index has delivered near-zero returns over the past decade, while the Shanghai Composite Index has barely grown. In contrast, India’s markets have shown steady compounding growth, reinforcing their appeal for long-term investors.

How Investors can Invest in China
The Shanghai Stock Exchange (SSE) and the Hang Seng Index (HSI) are the two primary gateways to Chinese markets, but their nature and investor base differ significantly. While the SSE provides more diversified opportunities linked directly to China’s economic growth, the HSI is often the more accessible route for international investments. For Indian investors, direct investment in Chinese stocks is challenging due to regulatory barriers, foreign taxation complexities, and currency conversion issues. However, mutual funds and ETFs offer a structured approach to investing in China without having to navigate these obstacles. A key challenge remains: most international funds are currently not accepting fresh investments due to RBIimposed restrictions on overseas’ fund flows.

Key Investment Themes in China
The country is at the forefront of artificial intelligence (AI) and technological innovation, making its technology companies attractive investment prospects. The insurance sector is undergoing regulatory reforms, creating potential for a turnaround. With its position as the world’s largest electric vehicle (EV) market, China stands to benefit significantly from the global push toward sustainability. Meanwhile, the real estate and home improvement sectors could see a revival, aided by government stimulus measures.

Mutual Funds Offering Exposure to Chinese Equities
One of the most popular funds available to Indian investors is the Edelweiss Greater China Equity Offshore Fund (EGCEOF), which invests in the J P Morgan Greater China Fund. It focuses on market leaders with strong fundamentals, high return on equity, and low debt. The fund holds about 60 stocks across China, Hong Kong and Taiwan, with key allocations in technology, consumer discretionary, and communication services. Another option is the Axis Greater China Equity Fund of Fund (AGCEF), which invests in units of the Schroder International Selection Greater China Fund.

Like the EGCEOF, it provides exposure to Large-Cap and Mid-Cap companies in China, Hong Kong and Taiwan, tracking the MSCI Golden Dragon Index. Notably, AGCEF also has a small allocation to Australian equities traded on Chinese exchanges, adding an extra layer of diversification. For investors seeking a passive approach, Nippon India ETF Hang Seng BEES offers exposure to the largest and most liquid companies listed on the Hong Kong Stock Exchange.

It represents finance, utilities, real estate, and the industrial sectors. Another strong ETF choice is the Mirae Asset Hang Seng Tech ETF, which tracks the Hang Seng Tech Index—a basket of 30 top Chinese technology companies listed in Hong Kong. These firms are at the forefront of digital transformation, fintech, cloud computing, and autonomous vehicle technology. Given China’s heavy investment in research and development, the Hang Seng Tech ETF has outperformed many broader market indices, delivering over 64 per cent returns in the past year. The table below indicates mutual funds with exposure to Chinese equities.

China’s stock market is experiencing a major rebound, and Indian investors looking for geographic diversification may find it an attractive opportunity. However, investing in China is not without risks—geopolitical uncertainties, shifting regulatory policies, and market volatility must be carefully considered. While mutual funds and ETFs provide a simplified and structured approach to investing in Chinese equities, investors should weigh potential rewards against inherent risks before making any investment decisions.

Should You Invest in China?
Despite its recent stock market surge, investing in China remains complex. Government stimulus measures—including rate cuts, liquidity injections, and relaxed real estate policies— have provided a short-term boost, but long-term sustainability is uncertain. For Indian investors, mutual funds and ETFs offer accessible exposure, but ETFs often trade at steep premiums due to the Reserve Bank of India’s restrictions on fresh investments in international funds. Beyond logistical hurdles, volatility remains the biggest concern. China has seen multiple boom-and-bust cycles, with abrupt policy shifts, regulatory crackdowns, and geopolitical tensions triggering sharp sell-offs.

The real estate sector remains fragile, as debt-laden developers like Evergrande and Country Garden struggle. Currency fluctuations also pose risks, as a weakening yuan can erode returns for foreign investors. Given these complexities, should Indian investors allocate part of their portfolios to China? Aggressive investors with a high-risk appetite may consider a 5-10 per cent allocation to China-focused funds for diversification, as China’s strengths in industrials, materials and technology hardware complement India’s dominance in IT, financials and consumer discretionary.

However, conservative investors may prefer India’s stability and long-term growth. To mitigate risks, a phased investment approach through SIPs in China-focused mutual funds can help manage volatility and reduce market timing risks. China’s transition toward advanced manufacturing, clean technology, AI, and electric vehicles mirrors Japan’s economic transformation, which led to a structural re-rating of its stock market. If executed well, these changes could unlock significant long-term value.

Investment Strategy Based on Risk Appetite
1. Aggressive investors can consider a 5-10 per cent allocation to China-focused funds for diversification.
2. Conservative investors may find India’s long-term prospects more attractive and avoid China exposure.
3. SIPs in China-focused mutual funds can help manage volatility risks over time.

To evaluate the case for diversification through Chinese equities, understanding the correlation between Nifty, Shanghai Composite and Hang Seng is essential. A lower correlation indicates better diversification potential. However, the correlation table below suggests that while Chinese equities offer some hedging benefits for Indian investors, the extent is limited. The correlation between Nifty and Shanghai Composite stands at 0.37, indicating a moderate positive relationship. This suggests that while the two markets do not move in perfect sync, they exhibit some degree of co-movement.

In contrast, the correlation between Nifty and Hang Seng is lower at 0.12, implying a more independent movement between the Indian and Hong Kong markets. The highest correlation is between Shanghai Composite and Hang Seng at 0.43, highlighting their closer economic and financial linkages. A moderate correlation (0.37) between Nifty and Shanghai Composite indicates that Indian and mainland Chinese markets share some common influences, which help reduce the extent of diversification benefits. However, the weaker correlation (0.12) between Nifty and Hang Seng suggests that Hong Kong equities provide relatively better diversification opportunities.

While the correlation analysis reflects a positive relationship among these indices, limiting diversification benefits, foreign portfolio investors (FPIs) often follow a ‘Buy India, Sell China’ or ‘Buy China, Sell India’ strategy, anticipating inverse movements. For risk-taking retail investors, using Chinese equities as a diversification tool is a viable strategy despite the moderate correlation.

Final Thoughts
China’s shift from real estate and low-cost manufacturing to clean technology, robotics, AI, advanced medicine, and electric vehicles mirrors Japan’s economic transformation, which led to a structural re-rating of its stock market. This evolution presents a high-risk, high-reward opportunity for investors but requires a long-term perspective and disciplined investing. For Indian investors, a balanced approach— leveraging India’s economic stability while selectively tapping into China’s valuation-driven recovery—may be the most prudent strategy. While valuations appear attractive, regulatory unpredictability and geopolitical risks remain key challenges. A cautious allocation through actively managed mutual funds and ETFs can help mitigate risks, allowing investors to participate in China’s evolving growth story without excessive exposure to volatility. Given the cyclical nature of China’s economy, maintaining a long-term vision is crucial. While China’s resurgence presents compelling opportunities, it is best suited for those with a higher risk appetite.

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