Will fall in China’s benchmark Shanghai Composite help Dalal Street bounce back?

Will China’s recent pain be India’s gain? That is the question many Dalal Street participants are asking with China’s benchmark Shanghai Composite sliding 13% over the past five trading sessions.

India’s Sensex gained 4% during the same period. The decline in Chinese stocks was particularly severe on Friday as the Shanghai Composite dived almost 6% amid worries that the recent rally fuelled a stock bubble. Chinese stocks have gained 120% in a year compared to Sensex’s 7%. The India versus China comparison has intensified in the recent months because part of the money that foreign portfolio investors (FPIs) have been pulling out of Indian equities has flown to China.



While India optimists are hoping the money which went out will return with Chinese stocks in turmoil, the debate is not that simple. Selling by FPIs in Indian stocks, which started in April, is yet to recede.

Also, Indian stock valuations are almost around the same levels as China’s and there is no evidence yet that corporate earnings growth is set to recover. Investors in India were relieved after the MSCI did not include China-A shares in its emerging market indices, resulting in global investors paring positions. Exclusion of China for the time being from MSCI has averted the outflow from India, whose weight would have dipped on the MSCI following China's inclusion.