Hi everyone. I am an investor mostly investing in Index using passive funds. I was watching some finance videos then I came across this video by CNBC.
China’s index/SSE has hardly given any returns in the last 20-30 years if we adjust for inflation. I find it very strange. China’s economy has grown drastically in the last 20-30 years. But their index. Not so much. I know countries can go into a bear market. Like 2008, 2020, etc. But the indices usually return to their ATH and keep growing further. The same can’t be said for China.
I am not an expert but does anyone know why is this the case for their index? And if it’s possible for the Indian market to experience something similar. Talking about long term here. As in how it’s for China’s index i.e. for 20-30 years.
P.S. I do see some people mentioning that China’s govt has some control over their index, or they have made it harder for FIIs to invest and usually FDIs happen in China. So, people will usually invest in something like Tencent over their index. Also, locals there don’t invest in the market and invest more in bonds, fds, etc. and that’s what the government also promote to them. Also, India is a growing economy this might not happen as the index slows down when the companies in it aren’t growing but I find it strange that this happened in China.
2 factors to consider while evaluating equity returns
Past PE to present PE comparison
Inflation rate CAGR
In 2005 (20 yrs ago), Shanghai index was 1200 at 24 P/E.
Today, it is 3250 at 13.8 P/E.
Equity CAGR = 5.1% +1.5% dividend = 6.6% which is very good considering the inflation rate of 2%.
Current P/E can expand to a nominal 16 in which case index will be 4000 and 20 yr CAGR = 7.7% which is great.
This media and fund managers project that shanghai did not create wealth in long run but it is false. Only those who bought in 2006 & 2007 got trapped (PE shot up to 60). At any other point in time, investors had made good returns.
I think as long as our current as well as projected, GDP is significantly more than the inflation, our markets will keep rising. Hope we do not have to experience the PE compression, consolidation etc in our life.
While the Shanghai Composite Index (SSE) has had periods of high returns, its long-term trajectory has been weak compared to global benchmarks like the S&P 500. For example, from 2000 to 2024, the SSE has remained volatile, struggling to maintain long-term gains. Even if the index has seen nominal growth, real returns adjusted for inflation, currency depreciation, and opportunity costs have been poor for long-term investors. Many global indices have significantly outperformed Shanghai, making it a weak long-term wealth creator.
I have already mentioned about real return adjusted for inflation which is quite good.
Regarding currency depreciation,
1 USD = 8 Yuan in 2005
1 USD = 7.23 Yuan in 2025
So chinese currency has appreciated.
How can one approach oppurtunity cost? It is judged based on hindsight advantage. Next 10 yrs, Shanghai may outperform S&P 500 due to valuation gap. Then after 10 yrs, one can regret that i should not have invested in US but in china and regret the oppurtunity cost.
One more metric to check is inflation. Japan had deflation and now inflation. While in deflation, Japan indices were flat to negative. Same thing is repeating in China, it is currently in deflation.
