Why Investors Are Rotating from India to China — And Why Experts Urge Caution

In recent months, global investors have been shifting their focus from India to Chinese equities, driven by a breakthrough in artificial intelligence. This shift has led to a significant rise in Chinese stocks while Indian markets face increasing pressure.

The catalyst behind China’s market surge is the latest AI model from DeepSeek, a Chinese AI company that has developed a cutting-edge system capable of competing with leading U.S. firms. This model, known as DeepSeek R1, has impressed investors with its superior performance and lower costs, sparking renewed confidence in China’s technology sector.

As a result, the MSCI China Index has risen 26.5% from its January low, reflecting an 18% gain year-to-date. The Hang Seng Tech Index, which tracks major tech companies in Hong Kong, has also surged to a three-year high, signaling a renewed appetite for Chinese tech investments. Alex Smith, Head of Equities at Abrdn, described this development as a turning point for Chinese markets.

While China’s stock market gains momentum, India’s financial markets have been moving in the opposite direction. The MSCI India Index has dropped by more than 7% since the start of 2025, reflecting concerns about an economic slowdown. India’s GDP growth slowed to 5.4% in the third quarter of 2024—its weakest expansion in nearly two years. The government also revised its full-year growth forecast for 2024-2025 to 6.4%, the lowest in four years. These factors have led global investors to reconsider their exposure to Indian markets.

According to a recent Nomura survey, global investment funds have been reallocating their portfolios in response to these market trends. More than half of surveyed funds have reduced their Indian market exposure, while 33% have increased their positions in Chinese and Hong Kong equities. Furthermore, a growing number of investors are turning cautious on India, with an additional 6% of funds taking an underweight position in Indian stocks.

Several prominent portfolio managers have made significant adjustments to their allocations. Nicole Wong from Manulife has reduced holdings in Indian equities, shifting capital towards China’s rising tech sector. Ken Wong of Eastspring Investments has also taken a more balanced approach, with 51% of his portfolio in China and 46% in India. He has scaled back investments in Indian mid- and small-cap stocks but remains invested in the country’s banking and real estate sectors.

Despite China’s stock market rebound, experts caution that risks remain. James Liu, Founder of Clearnomics, points to several ongoing challenges. Trade tensions between China and the U.S. could create new obstacles for economic growth. Additionally, China’s financial system remains vulnerable, particularly due to difficulties in its real estate sector. There is also uncertainty surrounding the government’s long-term stimulus policies, making it challenging for investors to plan with confidence.

The rapid rotation of funds from India to China highlights how global markets can shift in response to technological advancements and economic cycles. While China’s tech sector currently presents attractive opportunities, the risks should not be ignored. At the same time, India continues to be a leading destination for long-term investment, supported by its expanding digital economy and structural growth potential.

For investors, diversification remains key. While some may choose to capitalize on China’s AI-driven stock surge, maintaining a balanced portfolio can help mitigate risks associated with market volatility. The coming months will reveal whether this trend is a short-term market reaction or a lasting shift in global investment flows. Investors should stay informed and flexible as they navigate these changing dynamics.