This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
China’s economy has shown promise for quite some time. Pre-1978, China saw 6% annual GDP growth. Yet after this (i.e. when the state started relinquishing control over productive assets), the growth rate shot up to 9%. In 2021, the World Bank still projected 8.1% growth for China despite the challenges from COVID-19. Along with this booming economy are rising Chinese companies like Alibaba, Tencent and JD – mirroring successes from US’s big players like Amazon and Google. These present intriguing opportunities for investors, yet how do you invest in China? Moreover, should you?
In this article, our team at Elmfield Financial Planning here in Padiham, Burnley, Lancashire offers some thoughts on this important subject. We hope this is helpful to you. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
China’s economy – an overview
Since the mid-20th century, the USA has dominated the global economy – solidifying its role as superpower after the fall of the Soviet Union in the early 1990s. China, by contrast, experienced multiple military defeats, civil unrest and famines since during the 19th and 20th centuries. This picture started to change in 1978, when Deng Xiaoping took power and focused on the market to stimulate economic growth. With a particular focus on manufacturing, China overtook the US in 2010 and today has opened its economy much more to foreign investment.
Separating China from its stock market
It is important not to assume that China’s stock market has been as successful as its economy. In fact, the former has had a rocky history. In 2015-16, the Shanghai Composite fell by 25%. A third of the value on the Shanghai Stock Exchange was lost within a single month. This all took place amidst GDP growth of 6.9%.
Chinese stocks trade primarily on the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Like other exchanges (e.g. those in the UK and US), China requires companies to follow certain listing requirements to be listed. However, China remains a communist country despite adopting more free marketing principles. The government can – and does – still interfere with its stock markets, which can affect valuations. Moreover, the norms and requirements for Chinese exchanges are different from those in the West – making things complicated for investors interested in Chinese stocks.
Potential rewards
Let’s start with some positive aspects to Chinese investments. Firstly, they offer a great way to diversify a global portfolio. Rather than simply investing in the UK, for instance, an investor can spread their funds across multiple countries such as the US, Japan and “developing markets” like China. This can help to protect your portfolio from investment risks unique to any single country. For instance, a portfolio consisting solely of British stocks may be more vulnerable to Brexit economic turbulence than a globally-diversified one.
Investing in China also gives you the opportunity to access some of the biggest, fastest-growing companies in the world right now. Tencent Holdings, for instance, has grown its stock price by over 130% in the last 5 years. The Chinese population is still growing at a rapid pace, and its middle class is also expanding (which means more people with money to spend on products and services offered by Chinese stocks). On paper, at least, there is still considerable room for even large Chinese companies to keep growing – potentially along with their stock prices.
Risks to consider
On the flipside, Chinese stocks do present multiple risks – many of which are not known by large numbers of investors. Firstly government interference looms larger over Chinese stocks compared to, say, US stocks. In 2021, for instance, the Chinese government led a series of “crackdowns” on Alibaba – one of its leading companies. Despite its huge popularity, Alibaba was subjected to multiple fines and investigations. Many analysts believe this was motivated, at least partly, by a desire to punish CEO Jack Ma for publicly criticising the government. A huge 18.2 billion yuan fine was also issued, contributing to Alibaba’s sliding share price.
Scenarios like this are hard to predict. There is also the ongoing “trade war” between the US and China, where mutual threats of tariffs – and delisting Chinese shares from US exchanges – continue to bring uncertainty and volatility to share prices. Another risk to consider is the “VIE structure” underlying many Chinese investments. This enables Chinese companies like Alibaba to list on US exchanges, but investors are not able to invest in their shares. Instead, they can invest in the VIE (variable interest entity) – which is an offshore entity set up by the company for overseas listing purposes. This means that investors do not own the “underlying assets” when investing in a Chinese stock listed on their brokerage platform. The problem is that this structure is legally dubious and could be banned in the future.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
