Commentary
India’s stock market cap recently became the fifth largest in the world, surpassing Hong Kong’s. This looks unbelievable at first glance, given India’s developing impression to many of us. But even as emerging as Jakarta could have an IPO amount exceeding Hong Kong, then one should seriously rethink something that is changing structurally. More generally, the capital outflow from China and Hong Kong has been crystally clear: All neighbouring stock markets performed well (or not bad) except these two, which were confined to a downtrend.
The accompanying chart compares China and India stock indexes: the two series look commoving, but pay attention that one of them (the China one in red on the left scale) is reversed. The story was not like this prior to 2021. In 2021 and 2022, the two generally moved opposite to each other (so that they look commoving in this chart), but there were still short-term discrepancies observed. From 2023, however, such opposite movements became more tightly correlated, suggesting a much stronger capital relocation from one to another.
Relocation out of China is not new; people have been talking about and have been really doing so for years. Although India is large enough to absorb quite a portion of production from China, the capital market of the former seemed not yet ready in various aspects. Inferentially, Japan should be the natural candidate to re-takeover the leadership role as the Asian financial centre. The fact is that both Japan’s and India’s stock indexes began to surge in 2023, whereas those of China and Hong Kong started another wave of decline almost simultaneously.
The key reason for this was actually mentioned here—towards the end of my piece two weeks ago, I claimed that China is overturning the capitalism that has been practiced over the past few decades. The strong desire of China’s leader to forever maintain a dictatorship by getting rid of the riches is becoming clear to the world. This means an institutional change. This has far stronger implications than a kind of bubble burst then lost decades, as experienced in Japan previously, because an institutional change will never recover even after many decades.
Finance is somehow undetachable from economics. As India is huge enough to absorb the production outflow from China, sooner or later, the demand for a capital market will be there. Many major foreign banks and fund houses have foreseen this and established offices there.
Nowadays, most financial activities are done online, and as long as the Internet infrastructure and friendly policies are there, progress can be made fast. The former is hardware, which is relatively easy. It seems the latter, which is software, is somehow ready, too.
Intangible assets are highly mobile. Talents and money could move from one place to another in a short period of time, and hence those international statuses and rankings. The remaining major risk is whether the loser will try to overturn the status quo by initiating a regional war or the like.
KC Law, Ka Chung
