In today’s Finshots, we tell you why China’s $11 trillion stock market has been an underperformer, what’s been done to fix it, and how it all compares to India.

But before we begin, if you’re someone who loves to keep tabs on what’s happening in the world of business and finance, then hit subscribe if you haven’t already. If you’re already a subscriber or you’re reading this on the app, you can just go ahead and read the story.

The Story

The markets always have a tendency to go up. Or so you must have heard.

But here’s a stat that might shake that belief. ₹10,000 invested in China’s CSI 300, the benchmark index that tracks the top 300 stocks, 10 years ago would be worth just about ₹13,000 today. That’s barely 3% a year for the world’s second largest economy. The same money in the US S&P 500 would be over ₹30,000, and over double in India’s Nifty 50.

So what went wrong with Chinese stock markets?

Well, it all goes back to how they were designed.

When China opened its stock exchanges in the 1990s, the idea wasn’t to make investors wealthy. It was to funnel household savings into state-owned enterprises or SOEs, as they call it, to fund national development. In other words, China’s market was built as a financing tool for the state. It cared little for shareholders. And that DNA never really changed since SOEs accounted for half the value of China’s top 100 listed firms even in 2023.

And these companies care more about jobs and policy goals than about profits. They dilute investors by raising fresh equity whenever they want. Their governance is weak. Their returns on equity are low. As an IMF study puts it, “publicly listed Chinese state-owned enterprises (SOEs) are less productive and profitable than publicly listed firms in which the state has no ownership stake. In particular, Chinese listed SOEs are more capital intensive and have a lower average product of capital than non-SOEs. These productivity differences increased between 2002 and 2009, and remain sizeable in 2019.”

Then there’s the oversupply problem.

China has been one of the top rankers on global IPO charts for years. Policymakers loved it because it meant more money for their firms. But it didn’t do much good for investors. Strict listing requirements even encouraged companies to opt for financial fraud, which also led to many delistings, and all of this left investors and creditors burnt.

This also meant limited foreign funds flowing in Chinese markets, which have always been tightly regulated. If you want to know how, check out this story we wrote that explains how convoluted it is for outsiders to even buy Chinese shares.

So yeah, you can see why the market has been sluggish for so long.

And it shows up in household savings behaviour too. Chinese households save nearly 35% of their disposable income compared to about 4% in the US. Because well, when markets underperform and lose trust, people stash away cash instead of investing.

Now China knows this is a problem and it wants to desperately change that. After all, it wants to meet economic growth targets, and for that you need to stimulate domestic consumption.

And it seems it’s been doing a lot. It has slashed stamp duty on stock trades. It’s slowing down IPO approvals and cracking down on financial fraud. It’s even nudging firms to pay higher dividends and pushing its “national team” of state funds to buy billions worth of exchange traded funds (ETFs) whenever markets look shaky.

But does that make a meaningful dent?

Well, not really. Because the real fixes could be harder.

Take domestic demand, for instance.

China’s growth has always leaned on investment, not consumption. It’s been a part of the nation’s ‘investment-led growth’ model it adopted in the 1980s, where the nation takes on massive public investments and suppresses household consumption. And it did make sense in the 1990s and 2000s since the country needed roads, ports, factories, airports. But once those boxes were ticked, the model didn’t stop. Capital kept flowing into projects with little payoff. And as a result, debt ballooned faster than GDP.

Meanwhile, households never picked up the slack. Savings stayed high, spending stayed low. For context, household consumption is just 40% of GDP in China, compared to 60% in India! So when investment stops delivering and consumption can’t take over, China is left relying on trade surpluses: selling more abroad than it consumes at home. And that’s not a sustainable model when the rest of the world is slowing.

Which also makes us ask, what has India done differently?

Because back in the 1990s, India and China weren’t far apart. India’s per capita income was around $367 and China’s was $317. But reforms changed the game.

In India, liberalisation in 1991 opened the gates for global capital. PSU disinvestment created investable assets. The RBI built a reputation for prudence in managing growth and stability. Rising incomes meant households finally had money left after essentials. And those savings flowed into markets. So unlike China’s top-down props, India’s bid was bottom-up and sticky.

On top of that, India fixed the market plumbing. T+1 settlement across the market makes trades faster and safer. These small, boring reforms add up to trust.

And unlike China, India’s market isn’t dominated by state giants. Yes, PSUs matter, but private firms drive the index. Pair that with rising corporate earnings, and you get a market where profits are growing but liquidity is growing even faster. And perhaps that explains why the market valuations today are rich compared to China’s.

So what do we make of all this?

Economists have long argued that strong investor protection leads to deeper markets and higher valuations. And China’s periodic crackdowns and SOE dominance explain its discount.

There’s also the question of maturity. Mature markets often deliver lower returns simply because they’re already deep, liquid and efficient. China is a good example. From the 1980s, it grew at roughly 10% a year for three decades, powered by an investment binge that built factories, roads and entire cities. But by 2010, the model began to exhaust itself. Each new yuan of investment delivered less economic return, and as we mentioned before, debt piled up faster than growth. And that fatigue is reflected in the stock market too. China, by sheer size and depth, already looks like a mature market which doesn’t have exponential growth on its side.

So can China’s stock market come back?

Possibly. If SOEs genuinely raise payouts, pensions grow into real long-term capital, and households take home a bigger slice of GDP, the market can rerate. Some analysts even call it a “value trap” that could one day be a “value opportunity”. But there’s one big caveat. Policy consistency matters more than cheap valuations. And maybe that’s the message. The market’s edge isn’t just growth or liquidity; it’s trust. And like compounding, trust only works if you don’t break it.

Until then…

Don’t forget to share this story on WhatsApp, LinkedIn and X.

Did you know? Nearly half of Indians are unaware of term insurance and its benefits.

Are you among them?

If yes, don’t wait until it’s too late.

Term insurance is one of the most affordable and smartest steps you can take for your family’s financial health. It ensures they do not face a financial burden if something happens to you.

Ditto’s IRDAI-Certified advisors can guide you to the right plan. Book a FREE 30-minute consultation and find what coverage suits your needs.

We promise: No spam, only honest advice!