India May Lose $2T, Set Back 24 Years as Capital Shifts to China

As we have analyzed multiple times,the asset siphoning effect of China is accelerating,with substantial capital inflows from the Indian market to China.As expected,the latest news on October 7th showed that,according to Nikhilesh Kasi,a Goldman Sachs India trader,the most frequently asked question by clients over the past two weeks has been,"Are we seeing capital flow from India to China?" He unequivocally responded,"Yes."

Kasi explained that,based on the capital flows observed by Goldman Sachs,this trend is very evident.The intense buying in the Chinese market has led to the increasing fragility of the Indian market.In other words,Chinese assets are clearly exerting a siphoning effect on Indian capital.

Kasi believes that foreign institutional investors are selling their most held and most liquid assets to extract maximum liquidity in the shortest possible time.This liquidity is pouring into the Chinese market along with the global investors' favor towards China.For instance,the intensity of Goldman Sachs clients' selling of Indian stocks has doubled.The Indian Nifty index fell by 4.5% last week,marking the worst weekly performance since June 2022.

Data shows that last week,global funds' net sales of Indian stocks reached a record high,with the Indian stock market experiencing the largest net sell-off by global funds since January 1,1999.According to data from the Securities and Exchange Board of India,on October 3 alone,global funds net sold $101.7 million (approximately 8.5 billion Indian rupees) worth of Indian bonds; according to exchange data,on October 3,global funds net sold $1.85 billion (approximately 155.4 billion Indian rupees) worth of Indian stocks,a record high.Data indicates that from October 1st to 4th,foreign capital withdrew a net of 271.42 billion rupees from the Indian stock market,with October 2nd being a trading holiday.

A comprehensive analysis suggests that the selling wave in the Indian market is due to the accelerating and ongoing upward trend of China,the world's second-largest economy.The Chinese stock market has staged the largest increase since 2008,becoming a global capital benchmark.Even more American traders are closely watching the "night session" of the Chinese stock market to avoid missing the opportunity to rise.Some Wall Street traders believe that the increase in the Indian market over the past two years has been a "misallocation." In fact,the fundamentals of the Indian economy and growth have been overspent in advance,and this is the time node for dollar capital to harvest India.

Alex Duffy,an emerging markets expert at Marathon Asset Management,believes that India's capital market is currently beginning to collapse.Since 2022,private investment funds from Indian banks and other financial institutions have almost doubled.Particularly driven by retail investors,the valuation of Indian mid-cap stocks has been pushed to 35 times expected earnings,70% higher than the long-term average,but there has been no significant improvement in growth rate or potential profitability.Therefore,the risk of Indian asset prices being hit back to their original form will become apparent with the clear introduction of more competitive market easing monetary measures.This will lead to the withdrawal of related funds from the Indian market and inflow into China.

Analyst Edward Chancellor said on October 4th that investors made two major mistakes when investing in emerging markets.First,despite no evidence showing a positive correlation between economic expansion and stock market returns,people were often easily attracted by GDP figures.Second,people mistakenly believed that valuations were a reliable predictor of returns.Since the 2008 financial crisis,the strong performance of the Indian stock market relative to the Chinese stock market has shown how wrong this approach is.

The term "emerging" itself implies that underdeveloped economies with strong growth prospects are expected to bring substantial investment returns.Over the past 15 years,both the Chinese and Indian economies have achieved rapid growth.In constant US dollars,China's GDP is about 2% higher than India's each year.In September 2009,the price-to-earnings ratio of the MSCI China Index was 25% lower than that of the MSCI India Index.Since 2014,the annual total return of the Chinese stock market in US dollars has only been 2.5%.The annual compound growth rate of the Indian stock market is four times this figure.This has laid the groundwork for a large amount of global capital to withdraw from markets with severe bubbles like India today and flow into the Chinese market to bottom fish.

In addition,the Bombay Stock Exchange's Sensex 30 index rose from 5,375.11 points on January 3,2000,to a high of 81,688.45 points on October 4,2024,an increase of 14.2 times.In the two years after the pandemic,the Bombay Sensex 30 index's increase was at a high level among the world's major stock indices,with full-year increases of 15.60% in 2020 and 21.69% in 2021.

A JPMorgan report shows that over the past three years up to the first quarter of this year,the Indian stock market has soared by 46%,higher than the 20% increase recorded by the global stock market,while emerging market stocks have fallen by 13%.Only the United States can match this during the same period.As shown in the figure,the changes in past indices indicate that China's capital market is severely undervalued by the market,while markets like India and the United States have a significant risk of bubble burst.Between 2014 and 2023,Indian companies' return on equity (ROE) remained stable within the range of 10% to 13%,while Chinese companies' average ROE declined from 10% to 6% during the same period.Data from CLSA shows that since 2014,the total number of stocks in the MSCI China Index has increased by 2.5 times.However,earnings per share have hardly changed.Investors have taken note of this.The valuation of China's benchmark index has dropped from over 2.5 times book value in 2020 to 1.3 times earlier this year.In contrast,the price-to-book ratio of the MSCI India Index has averaged more than 3 times over the past decade and has now risen to 4.5 times.This again indicates that if macroeconomic monetary policy is widely and continuously supported,Chinese assets have a more reasonable upside potential compared to Indian assets.

Not only that,India's much-criticized business environment has made the country's treatment of foreign and domestic investments capricious,with frequent changes and weak infrastructure and health facilities,often leading to various absurd "stories"...This has led some of the world's manufacturing giants to constantly rethink whether it is necessary to continue setting up factories in India.

For example,the frequent occurrence of "deadbeat" phenomena in India has cast a shadow over the country's economic credit,and India has been listed as one of the most difficult countries to do business in by the World Bank's reports for several years in a row.In recent years,the number of international arbitration cases filed by some international capital or enterprises against India's economic credit issues has been the highest in the world,including well-known international companies such as Deutsche Telekom,Dutch Vodafone Group,Russian power operator Sistema,TCI Cyprus Group,and Japanese Nissan.Companies have filed arbitration against India over a series of issues,including retroactive taxes and payment disputes.

In fact,"Modi economics" since 2014 has made India's economic planning dual-sided,one side "attracting investment," and the other side preventing problems before they occur.Leaving enough room for local development,while also sparing no effort to protect and support local enterprises,stifling international capital from growing and strengthening in India.This has led to international enterprises and capital groups in India accelerating their withdrawal from India against the backdrop of not adapting to India's economic environment.

So far,Tesla,Foxconn,Samsung,Ford,Disney,and other international corporate giants have all withdrawn part of their investments or planned to withdraw from India,with a considerable number of companies' production gradually returning to China.Data shows that last year alone,nearly 3,000 foreign enterprises left India in various ways,or directly announced bankruptcy in India.

The Financial Times,the US Consumer and Business Channel,and many other international media,as well as analysts from investment banks such as Morgan Stanley,have questioned that although the name "Made in India" is loud,it seems like a "mirage." "When the mainstream of global manufacturing is moving towards iteration by newer productivity and more refined high-quality productivity,a large part of the production in India and Vietnam,which still relies on contract manufacturing and simple assembly lines,cannot become a true world factory.

Because their productivity does not meet the new demands of the global economy,the soft power of India and Vietnam is obviously overestimated,leading to an increasingly severe bubble in the relevant capital markets.This will also accelerate the process of a large amount of capital withdrawing from India and Vietnam.

It is worth noting that according to the latest data from the Reserve Bank of India,India's current foreign debt is $682.3 billion,plus the debt of various states and provinces,India's total public debt is as high as about $1.5 trillion.However,as of the third quarter of this year,India's foreign exchange reserves are $704.89 billion,and public debt has reached 212% of foreign exchange reserves.

This indicates that the Indian economy is seriously in deficit,and its growth in the past few years has been achieved by being deeply trapped in a huge dollar debt black hole.This provides the Federal Reserve and Wall Street capital giants with the opportunity to use different currency cycles to harvest in India,providing a broad space.

Since 2023,the well-known Wall Street short-selling institution Hindenburg Research has repeatedly issued reports that the market value of Adani Group,owned by India's top tycoon Gautam Adani,is seriously overestimated,leading to a significant drop in the company's stock price and revealing the scars of the Indian economy.This classic case of Wall Street capital harvesting Indian assets has already explained the problem in advance.According to comprehensive analysis from The Economist and other sources,the Indian economy is currently in the most urgent situation of this century,and it may regress to the level around 2000,or it may retrogress by 24 years.Some analyses suggest that,based on the total market value of approximately $5 trillion in the Indian stock market,and the cumulative increase of over 40% in the past three years,Indian stocks are grossly overpriced.Reports analyzing and predicting that this over 40% increase might all be sold off by global buyers,especially by American capital on Wall Street,which could accelerate the harvest.It is estimated that up to $2 trillion in funds may withdraw from the Indian market.Against the backdrop of the US economy navigating the storm of the election and the two major geopolitical risks in the Middle East and Eastern Europe,which could trigger many uncertainties,these funds may soon accelerate their flow into the second-largest economy,China.