How To Invest In China (2024)

China is the second largest, and one of the fastest-growing, economies in the world but has largely failed to capture the attention of overseas investors.

While the eventual lifting of pandemic restrictions was expected to drive a recovery in the Chinese stock market, mounting headwinds have prompted a recalibration of investors’ expectations.

That said, China may still offer an attractive investment opportunity for investors looking to diversify their portfolios. It boasts global corporate giants such as Tencent and Alibaba, and is forecast to have the second-highest growth in gross domestic product (GDP) over the next few years, according to the latest figures from the OECD.

We’re going to take a look at some of the benefits and risks of investing in China, together with the wider outlook for the sector.

How has the sector performed?

After an impressive bull run, the Chinese stock markets crashed in 2015 during the two days coined ‘Black Monday and Tuesday’. However, they steadily recovered their losses over the following years, as shown below:

By 2021, the CSI 300, comprising the 300 largest-cap stocks traded on the Shanghai and Shenzhen stock exchanges, hit an all-time high of over 5,800.

However, share prices started to head downwards again as a number of factors conspired to dampen investor appetite.

Jason Hollands, managing director of Bestinvest, says: “Caution towards has been fuelled by weaknesses in the country’s economic model, which historically has been too reliant on debt-fuelled internal investment and exports.”

Darius McDermott, managing director of FundCalibre, comments: “We had government intervention in a number of sectors such as technology and education, which – coupled with ongoing concerns about the property market and further strict covid lockdowns – led to widespread falls in share values.”

State crackdowns on technology companies and the education sector have also prompted concerns amongst investors. In addition, China’s relationship with the West accelerated with the pandemic and worries have surfaced about the authoritarian direction that President Xi is taking the country, especially in its relationship with Taiwan.

Why consider investing in China?

China is the largest country in the MSCI Emerging Markets Index, representing about a quarter of the index by market capitalisation.

China is the second-largest economy in the world thanks to its exponential growth, with the World Bank reporting that GDP reached $18 trillion in 2022. Put into context, this is almost six times the UK’s output and dwarfs Japan, the third highest-ranked global economy.

The company is also home to some of the largest global companies. Tech giant Tencent is one of the world’s 30 largest companies by market capitalisation, worth around £300 billion. Drinks manufacturer Kweichow Moutai and e-commerce leviathan Alibaba are also sizeable businesses.

Although exports have played a key role in China’s economic success, it also has a burgeoning domestic economy. Dale Nicholls, portfolio manager of the Fidelity China Special Situations investment trust, points to a potential boost to consumption from the ¥30 trillion in household savings built up in recent years.

And while there is still uncertainty over the future direction of government policy, the threat of further anti-corporation regulations seems to be receding.

Mr McDermott says: “The government is working towards common prosperity but it can significantly impact share prices. We think there will be less of this intervention as the government wants to get the economy back on track.”

Dzmitry Lipski, head of funds research at interactive investor, adds: “In contrast to major developed economies at the moment, inflation is not a key concern for China, and this allows the government to implement more accommodative monetary and fiscal policy measures.

What are some of the drawbacks of investing in China?

One of the key risks of investing in China is the regulatory environment. The Chinese government introduced a raft of heavy-duty regulations against technology firms in 2020, amid concerns over their influence.

The ‘Big Tech Crackdown’ led to swingeing fines, with the highest-profile casualty being Alibaba, hit for a landmark $2.8 billion fine on anti-monopoly grounds.

Investors may also have concerns over the country’s political regime, including the future direction of policy under President Xi Jinping and fragile relations with the US and Europe.

China’s poor performance has also pulled down wider emerging markets and Asian indices. Over the last three years, the MSCI Emerging Market Index sunk by nearly 19% to February 2024. But with Chinese stocks excluded from the calculation, the performance recalibrates somewhat, producing a return of nearly 7% over the same period.

Hopes in early 2021 that the reopening of the Chinese economy would produce a sharp economic recovery, as had been witnessed elsewhere in the world, soon perished. As Bestinvest’s Jason Hollands points out: “Wary Chinese consumers have instead focused on rebuilding their savings rather than upping their spending.”

What are the options for investing in China?

There are a range of options available, from investing in individual Chinese companies to broader-based Chinese and Asian funds.

1. Investing in Chinese companies

Chinese companies can issue different classes of shares, depending on where they’re listed and which investors are allowed to own them. There are two main options for UK investors wanting to buy shares in Chinese companies:

• shares that are dual-listed on a US stock exchange, such as retailers Alibaba and JD.com
• American Depository Receipts (ADRs), which represent a specified number of an overseas company’s shares and are denominated in US dollars, rather than renminbi. ADRs can be traded on US stock markets and include Alibaba and Tencent.

Looking at individual companies, Fidelity’s Dale Nicholls picks out Wuxi AppTec for investors considering adding Chinese stocks to their portfolio.Wuxi is a leading biotech contract development and manufacturing organisation (CDMO) in Asia and one of the dominant global platforms in terms of sales.

Mr Nicholls comments: “Wuxi is a long-term compounder expected to benefit from global pharmaceutical industry growth and continued research & development (R&D) investment by the pharmaceutical companies.

“Continued outsourcing trend from in-house production to CDMO companies, particularly in China, also underpins its position. WuXi has established a robust talent pool with strong technical skills which has helped to drive a loyal and sticky client base and thecompany recently reported upbeat financial results.”

Another company worthy of consideration is home appliance manufacturer Hisense Home Appliances Group.

Mr Nicholls comments: “The company has around a 50% share of Hisense Hitachi, the number two central air-conditioning brand in China. While Hisense enjoys an industry tailwind from the cyclical recovery in the market, it’s also on track for margin improvement thanks to better incentives after the launch of an employment stock option plan.

“We think Hisense shows decent upside as the company still has multiple drivers in terms of market share gain in white goods and new business contribution with healthy order flow.”

2. Investing in Chinese funds

Investing in Chinese funds provides investors with exposure to the sector through a ready-made, diversified portfolio of shares. Investors have the choice of actively-managed ‘stock-picking’ funds or passively-managed ‘tracker’ funds.

interactive investor’s Mr Lipski picks the Fidelity China Special Situations Trust which provides diversified exposure to stocks listed in both China and Hong Kong. “Due to the trust’s single country exposure, its bias to small and mid-sized companies and its ability to use gearing, its return profile is likely to be more volatile, making it higher-risk and an adventurous holding in a well-diversified portfolio.”

FundCalibre’s Juliet Schooling Latter highlights the Invesco China Equity fund, commenting: “The manager aims to identify companies with a competitive advantage and sustainable leadership and specifically targets those he feels are undervalued by about 25-30%. He will then hold them with the expectation they will reach fair value over a three to five-year time horizon.”

What’s the outlook for investing in China?