India may lag behind China economically, but the reverse holds true for their stock markets. India’s has soared to a record high last week, driven by foreign investors pouring billions into the market.

Figures show the stock market in Mumbai is up 200 per cent over the past five years, compared with 65 per cent in China and 11 per cent in the US. India’s edge, experts say, lies in the contrast between its large contingent of private, profitable firms that operate free of substantial government involvement, and the many listed Chinese companies over which Chinese authorities exert considerable control.

“When Chinese companies — which were previously state-owned — were listed on the stock market, the government believed it was best to retain majority control,” says Peter Alexander, a former Wall Street banker who now runs the Shanghai-based financial consultancy Z-Ben Advisors. “So around two-thirds of a firm’s shares were held back by the Chinese state and couldn’t be traded. These shares could swamp the market and push prices down, which worried investors.” The large role played by the Chinese state in these firms also leads to concerns that they are run inefficiently, Alexander adds.

In contrast, several of India’s privately run, stock market listed companies, though forced to battle bureaucracy and red tape, are viewed as well-managed. “The efficiency of Indian companies and the transparency of our stock market are much higher,” says Mumbai-based private investor Rakesh Jhunjhunwala, who has turned $100 into an estimated fortune of $250 million by investing in Indian shares. “People like investing in our free and democratic country, where everything is open and known.”

In Mumbai concerns about the sustainability of the boom often play second fiddle to heady talk about India’s economic potential. Jhunjhunwala argues Chinese companies tend to be concerned with grabbing market share rather than making as much money as possible, whereas Indian firms are well regulated and focused on profits, which boosts their share prices. Yet previous Indian market booms during the 1990s failed to last. One was notoriously scarred by scandal and corruption, leaving ordinary private investors out of pocket. Most Indian private investors are still wary that unseen market manipulation will reveal the current stock market surge to be chimerical. Analysts say the Indian government still plays a large role in many areas of the economy, leading to inefficiency.

“I wouldn’t buy the Indian stock market today,” says Marc Faber, an investment expert. “If it goes too much higher, it could easily halve. Chinese shares, which were very expensive, are now more reasonable.”

Meanwhile the Chinese government, which, compared with India, has attracted far more foreign investment directly into its economy if not into shares, has begun to loosen its grip on the stock market. Analysts say the pressure on Chinese businesses to become more profitable is steadily rising, too. — The Christian Science Monitor