Indian equity markets have been underperforming their Chinese peers since the start of the year. The benchmark NIFTY50 index and SENSEX are down 12.72% and 11.67%, respectively, from their record highs. Meanwhile, China’s Shanghai Composite Index is up nearly 9%.

Chinese markets have been attracting investments amid an exodus of foreign funds from India. The unabated selling by foreign institutional investors (FIIs), which started in October 2024, has seen foreign funds offload shares worth ₹2.06 lakh crore, as per data from the National Securities Depository Limited (NSDL).

FIIs flock to China, flee India

China, the world’s second-largest economy, has attracted FII investments worth $1.3 trillion in January 2025 alone, according to a Bloomberg report. The sharp fall in the Indian market came after sky-high valuations in September when the NIFTY50 was creating new highs daily. However, the disappointing December quarter earnings by Indian corporates, among other factors, triggered an exodus of foreign flows.

December quarter earnings largely missed estimates. The earnings growth of the NIFTY50 companies was 5 per cent in the October-December period, a third straight quarter of single-digit growth after two years of double-digit growth, news agency Reuters reported.

Chinese stimulus measures

Meanwhile, the Chinese government has announced stimulus measures to boost its economy. These include a surprise wage hike for government workers in January, the issuance of special treasury bonds, the announcement of tax incentives on home and land transactions to boost the troubled property market and a rate cut in the benchmark lending rates. These measures along with many others have led to China becoming a favourable investment destination compared to India.

Attractive valuations of Chinese stocks, aided by stimulus measures, led to surging FII inflows into Chinese equities.

Chinese AI disruption

Adding to China’s appeal is the recent breakthrough in artificial intelligence (AI) by DeepSeek, a Chinese AI company. DeepSeek’s AI chatbot, developed at a fraction of the cost of its US counterparts, has disrupted the AI landscape. It has also cemented China’s position in the ongoing battle for supremacy in the AI arena. This technological advancement has further bolstered the bullishness of global investors towards China, as it underlines the country’s growing capabilities in cutting-edge technologies.