Is now the best time to invest in China?

Key takeaways

• Growth in China has stalled and debt continues to grow 
• Recent direct intervention has boosted volatility in Chinese stock markets
• Investors should be cautious of the ‘fear of missing out’

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China’s in some trouble.

It’s the second largest economy in the world, and it’s unlikely to lose that spot any time soon. But it’s undeniably facing big challenges.

Fiery growth over the last few decades has slowed. Its ageing population and falling birth rate could make China’s debt problem even worse. That’s worrying for a country already dealing with debt levels over 250% of GDP.

The last few weeks were supposed to provide some certainty. The Chinese government announced it was keen to boost the economy, and investors have been waiting with bated breath for the details ever since. 

But during what was supposed to be a clarifying press conference last weekend, Finance Minister Lao Fo’an failed to shed more light on the plan.

With all of this uncertainty, Chinese stocks have been on a non-stop rollercoaster for the past two weeks. China’s stock market hit record highs not seen in years, then endured their worst fall in 27 years. 

It’s clear that the markets want more clarity.

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Why invest in China?

As an investor, the best and hardest thing to do is to take a step back.

Getting caught up in short-term issues can lead to poor investment decisions.

Given the continued lack of clarity around stimulus plans, investors need to consider the state of the Chinese economy, its place in the world, and how decisions taken around the world affect it. 

This approach can offer much-needed perspective to make a rational assessment of the risks and possible rewards of investing in China. 

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Reasons to invest in China

1. Growth at all costs: While some experts say China may not meet this year’s growth target, Beijing insists it will. It’s feasible that China will only be able to meet its 5% growth target if the country musters up a hefty list of new measures to boost consumer and producer confidence. This could suggest that they plan to create a generous spending plan for increasing the country’s demand.
2. Consumer spending rebound: If the upcoming stimulus package is indeed bigger than expected, then government debt would increase, but household debt as a percentage of earnings could fall. For Chinese households this figure has been rising, so a change is needed to prevent consumers from running out of cash.
3. Government investment: As a major player in infrastructure, China’s decisions about how to deal with debt and infrastructure spending will impact industries worldwide. If consumer demand goes up, demand for commodities to fuel that demand will also rise. China is the biggest importer of crude oil and other raw materials in the world, so it certainly has the power to swing prices. 

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Risks of investing in China

1. Geopolitics: China has a highly complex relationship with the US, and tensions with Taiwan remain high. It’s a highly unpredictable landscape, and investors should keep up-to-date with international developments threatening to impact the market’s stability. Dynamics can change on a dime. 
2. Regulatory crackdowns: On several occasions, the Chinese government has imposed strict regulations to curb growth in certain powerful industries. For instance, two of the country's biggest companies, Tencent and Alibaba, were hit with hefty penalties for fostering “unfair competition” in the country. Neither has recovered to pre-crackdown valuations. Future actions along these lines are a serious risk to investors.‍
3. Slowing growth: As mentioned, China’s debt is rising, and growth is slowing. Outsized borrowing in the property sector has caused problems for governments at all levels, as well as consumers. A former deputy head of the National Bureau of Statistics explained that some estimate the country has enough vacant homes up to 3bn people. With too many properties, and not enough buyers, there are mounting concerns about the sustainability of China’s economic model. Short of significant direct government intervention, the market could be in for a challenging decade or more.

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How to invest in China from the UK

With some of the headwinds and tailwinds for China in mind, let’s take a look at how UK investors can get exposure to this massive economy. 

These options offer different levels of exposure and risk. In general, if you invest in individual stocks based in China, you take on more risk than with a fund or trust, which will manage some (but not all!) of the risk of overexposure to single companies or industries with diversification.

If you invest in commodities or key global industries that are impacted by Chinese demand, your investment performance will be driven by a number of factors impacting these global markets, not simply China’s economic fortunes. 

Diversified funds may be more suitable for most investors, but they are also not without their own risks. All investing carries a risk that you may lose your money. You should be prepared to hold trusts and funds for a minimum period of five years in most cases. 

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Four ways to invest in China

1. American depositary receipts (ADRs): ADRs represent shares of foreign companies and are traded on US stock exchanges. They allow investors in the UK to buy Chinese stocks without dealing with the complexities of local exchanges and capital controls. 

For instance, the Bank of China ADR gives you exposure in one of the world’s largest banks by market capitalisation and assets, without buying or selling shares directly on the Shanghai Stock Exchange. The bank has over £2.3 trillion in assets and operates in 62 countries. 

2. Exchange-traded funds (ETFs): ETFs offer exposure to a group of stocks across a theme or industry. 

The KraneShares CSI China Internet ETF, for example, focuses on China-based internet companies. Its largest holdings include firms benefiting from the country’s growing middle class, including Alibaba and Tencent. Just be mindful that an ETF like this one provides diversified exposure that is concentrated in a particular sector and region, meaning that the fund could be more volatile than one that has holdings across sectors and countries. 

3. Trusts: Investment trusts also offer access to multiple stocks through a single, streamlined investment. They are typically actively managed by experts who make decisions about which stocks to buy or sell.  

Fidelity China Special Situations PLC aims to invest in companies with long-term potential. So, they aren’t looking for quick wins. The trust includes investments in private companies that aren’t yet listed publicly, which can be a benefit for investors. Its long-term objective is to outperform its primary benchmark, the MSCI China index, which tracks about 85% of all Chinese-listed shares. Actively managed trusts may have higher fees than ETFs because of the research team involved.

4. Key industries: Finally, you could invest in companies around the world that benefit from China’s growth, rather than companies based there. The nation has a tremendous impact on global demand for commodities and luxury goods, to name two examples. 

Rio Tinto is a global mining company with UK and Australian headquarters. It mines and produces materials including iron ore, aluminium, and diamonds. Around 60% of its global sales come from China so new data and movement in China’s macroeconomic outlook have a very direct impact on Rio Tinto’s performance.

LVMH, the owner of brands like Louis Vuitton and Hermes, generates about 30% of annual revenue from Asia ex-Japan, largely stemming from Chinese consumer demand. When that demand flags, LVMH has historically struggled. 

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Should I invest in China?

If you’d like to add exposure to China in your portfolio, there are plenty of ways to invest and fulfil your desired level of risk and return. But in countries where geopolitical tensions prevail and governments are able to, at a whim, change the fate of an entire industry, it’s important to be comfortable with a degree of risk being entirely out of your control. Even a strong company can be affected by factors beyond its influence. If you decide to invest, make sure you understand the country’s broader vision as well as the aims of recent policy decisions.

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Important information

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