Is it time to invest in Chinese stocks again?

All in all, 2021, 2022 and 2023 were turbulent years for those holding Chinese stocks. The major stock indices fell by more than 40% during this period. Today it seems there is finally some light at the end of the tunnel. The Hang Seng Index has already risen by more than 15% this year (through to mid-May), climbing well ahead of the S&P 500. Recently, the index set the record for the longest continuous rise in 6 years.

The main reason for this optimism? Investors are seeing bright spots in the Chinese economy and are expecting the government to put in extra effort to boost confidence. Is this a sign to buy? Or are the risks – not least geopolitical tension – a reason to stay clear?

Why should I invest in Chinese stocks?

1. Tech rally. Much of the recent gains can be attributed to the price explosion of a few tech companies such as Alibaba and Tencent. Their recovery has attracted the attention of investors, who are afraid to miss out on a possible further rally. The question now is whether this upward trend will continue or weaken. The rally is currently driven by the expectation that these companies will (again) present healthy figures in the future. The positive vibes may continue if they effectively report such figures in the next few quarters.

2. Attractive prices. Chinese shares are particularly attractively priced. The so-called price-to- earnings ratio (P/E ratio) for the Hang Seng Index is currently around 10, while that of the S&P 500 is at a sturdy 25 (as at mid-May 2024). A lot of bad news seems to have already been factored into the prices. A high P/E ratio may indicate that investors are optimistic about future earnings, but it may also mean the market is overvalued. A low P/E ratio may indicate undervaluation, but also low growth prospects. Recently, investors in Asian markets have turned their attention to India and Japan. These markets have already seen a decent growth spurt, and it seems the momentum may now be shifting to China. This may be the start of a strategic shift, with investors looking for a new growth engine for their portfolio.

3. Policy support. The Chinese real estate crisis has weighed heavily on the Chinese stock market and, by extension, the Asian markets. Real estate is an extremely important cornerstone of the Chinese economy. According to Goldman Sachs Research, the real estate sector accounts for 30% of the Chinese economy. About 65% of family assets are tied up in bricks and mortar. The real estate crisis is far from over – real estate prices in the country's major cities fell again in March and international rating agencies have lowered the ratings of several major building promoters. However, there is also much hope vested in new stimulus measures for the Chinese economy and real estate sector. Investors expect the government to announce initiatives to reduce the cost of borrowing and even to purchase unsold properties.

4. Hong Kong dollar & US dollar. Chinese stocks listed in Hong Kong benefit from the fact that the Hong Kong dollar is linked to the US dollar. The US dollar has remained strong now that the US central bank is keeping interest rates higher for longer. A strong US dollar is usually detrimental to foreign markets, so while emerging markets in Asia and elsewhere are negatively impacted by the strong dollar, that effect is more limited in Hong Kong.

5. The long term. Although the pandemic, problems in the real estate sector, geopolitical turmoil and an increasingly ageing population have or are currently throwing a spanner in the works, the Chinese economy is still the second largest in the world. Technological progress, investments in infrastructure and a growing middle class remain important drivers of economic expansion. Many Chinese companies also have a competitive advantage in various promising sectors, such as electric cars. The government's efforts to focus more on domestic consumption (rather than only on exports) may also act as a buffer against external shocks in the future. China is also still the ‘world's factory’, accounting for around 30% of global manufacturing of goods (in USD).

Why shouldn't I invest in Chinese equities?

1. Overheated rally. Some strategists warn that the current rally is mainly based on sentiment and assume the recovery won't last long. They recommend investing selectively in individual stocks or to consider thematic investments rather than entering the broad market.

2. Uncertainty about the Chinese economy. Although optimism is increasing, the country still has a long way to go. China reported better-than-expected economic growth in its first quarter (5.3%), but also saw retail sales growth decline in March and industrial production lag behind forecasts. Foreign investment in China is also at a very low level right now. Despite a few green peaks in the Chinese economy, the recovery remains relatively weak. Of course, ’relatively’ is by definition open to interpretation. The Chinese economy grew 5.2% in 2023, and the government expects it to grow by another 5% in 2024. From our perspective in Europe, this is significant, but for an economy that has grown more than 10% per year for a long time, it is actually more moderate.

3. Geopolitical tensions. Relations between China and the US are strained, to say the least. Some of China’s largest tech companies in particular are facing a serious headwind. The recent increase in US import duties on Chinese electric cars, solar panels and steel is raising fears that a new chapter in the trade war is coming.

With the US elections in sight and China's flirtation with Russia, tensions are unlikely to ease any time soon. Although the issue of Taiwan has been less prominent in recent months, the situation remains highly uncertain.

How can I invest in China?

Different stock exchanges, different share classes, and many restrictions for foreign investors: at first glance, China seems to be a complicated market to enter. The fact that in China, green price signs refer to a loss and red prices symbolise a gain makes things seem even more abstract.

If you want to invest in Chinese stocks as a private individual, you can't simply go shopping on the Chinese stock markets. However, there are several alternatives available to invest in Chinese stocks via a detour. The use of American depositary receipts (ADRs) makes it easy for foreign investors to invest in Chinese equities. ADRs are financial instruments that represent Chinese equities and are traded on stock exchanges that are accessible to (Belgian) private investors. You can use these ADRs to invest in the most important and largest Chinese (tech) companies.

A second route is to go with trackers and funds. A tracker allows you to track the performance of an index. You can regard it as a basket of Chinese stocks. While you cannot invest directly in the index, you can invest in a tracker of the index. The MSCI China is an index for Chinese equities and an important benchmark. It comprises more than 700 mid and small cap size Chinese stocks. The index tracks ADRs, H-shares (listed in Hong Kong), A-shares (listed on mainland China) and other share classes. You will find all the well-known names in this index.

A second index that is relevant for foreign investors is the Hang Seng Index. It consists of Chinese companies listed on the Hong Kong Stock Exchange. There is an arrangement for mainland Chinese investors to invest in Hong Kong and vice versa. For foreign investors seeking access to China, a tracker for one of these indices is a simple and diversified way to invest in the broad Chinese stock market.

In addition to trackers, you can use actively managed investment funds focusing on China and/or the wider region. Managers of such funds try to outperform the market by selecting only those shares that they believe have the most potential. You pay more for this type of active management, without any certainty that the fund will outperform its benchmark.

In addition to general trackers and funds, you can also opt for thematic investments. Various trackers and funds focus solely on Chinese technology stocks, biotech and electric cars, for example.

Want to invest in Chinese equities, trackers or funds?

• Log in to Keytradebank.be on your laptop or desktop
• Click on Advanced at the top of the search window
• Tick Bonds, Tracker and/or Fund
• Use the term China to search for trackers and funds