China and India are both on the fast track to become the world's biggest economies. But while India's stock market has performed well in recent years, the opposite is true in China.

India's main stock market index hit a record high this week, closing above 10.000 points for the first time. Analysts said the milestone is a reflection of investor confidence in the Indian economy, which is growing by eight percent a year.

India's economic rival, China, has had an even bigger average growth rate of more than nine percent for the past few years, and is now the world's fourth biggest economy. But while India's stock market has soared in recent years, the opposite has happened in China.

Over the past five years, the Shanghai Stock Exchange index has slumped 40 percent, making it one of the world's poorest performers.

Robert Broadfoot, director of the Hong Kong risk analysis firm Political and Economic Risk Consultancy, says the main reasons for the differences are the inadequacies of China's capital market.

"China's market is much younger. It is dominated by state-owned companies, where the government still owns so many of the shares, that whenever the government tries to dispose of those shares, it depresses the market," he explained. "So, it's a relatively illiquid market. India is an older market. It has got more private companies on. It has got more genuinely interesting companies on."

Broadfoot also says India's currency is more freely traded, and there are fewer restrictions on capital. That makes it easier for foreign and domestic investors to move money in and out of the stock market. On the other hand, restrictions on capital flow in China work against the development of a stock market there.

Another reason China lags behind, he says, is that many Chinese have no confidence in the country's stock market.

"People had invested in the stock market in China, but because of the overhang of shares and the poor regulation in the market, there is just a lack of trust," said Broadfoot. "The people that tend to invest in the market in China, which is not nearly as open as the Indian market, tend to be - it's insider trading. People are just wary of that now."

Hong Kong remains the market of choice for Chinese companies in search of investor capital. The stock market is decades old and tightly regulated, and capital flows in and out of the city easily. It is considered one of the key international stock markets.

Broadfoot says mainland Chinese investors, as much as possible, prefer to put their money into the Hong Kong stock market, which enjoys greater credibility.

Hong Kong was reverted to Chinese sovereignty from British colonial rule in 1997, but it enjoys a high level of autonomy, compared to other Chinese cities. In addition, it has a British-style, independent judiciary and well-established contract law.