China has accomplished a great deal over the past few decades, transforming from a poor, insular, and rural economy to the world's second-largest economy. Its transformation has been hailed as an economic miracle. Yet this miracle hasn't been reflected in China's stock market. The China MSCI stock price index has been flatlining since the end of the Great Financial Crisis (GFC) in 2010. Over this same period, the US MSCI has increased sevenfold (chart)!
The same underperformance is visible in the Invesco China Technology ETF (CQQQ), which has been flat since the GFC (chart). Over the same period, Invesco's QQQ ETF--which tracks 100 of the largest US domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization--is up seventeenfold!
Meanwhile, the other major Chinese benchmark stock market indexes show that Chinese equities have been good for short-term trading, but not for long-term investing (chart).
Let's have a closer look at some of the fundamentals that account for the underperformance of Chinese stocks compared to US stocks:
(1) Why China lacks mojo. The divergence has occurred because China has an authoritarian command economy, while the US has an entrepreneurial capitalistic economy. US entrepreneurs are far freer to innovate, take risks, and prosper. Their Chinese counterparts operate under a government that tightly limits their freedom to run their enterprises optimally and to accumulate private wealth (and power).
