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Why should you invest in China? Why aren’t investors investing more in China?

Despite the poor performance of Chinese stock markets since late 2020, current valuations, along with possible pro-consumption and market support measures, make the Chinese market attractive.

1 AUG, 2024

By La Française

Author: Leslie Griffe de Malval, Global Equity Fund Manager, Crédit Mutuel Asset Management

Investing in Chinese listed companies generates some scepticism among investors. Indeed, since the end of 2020, Chinese stock markets have underperformed. There are several reasons for this underperformance:

Since late 2020, Chinese authorities have significantly tightened regulations in several sectors, penalising internet, education and pharmaceutical companies. These more restrictive laws have weighed heavily on certain stocks and dampened investor sentiment due to the uncertainty generated.
China took longer than other countries to recover from COVID-19. The effect of the reopening was not as strong as expected, as consumer confidence in the Chinese economy faltered and high unemployment rates encouraged saving to the detriment of spending.
The wealth effect among the Chinese population has been significantly affected by a major property crisis in the country. The Chinese government sought to stabilise what it considered an overly speculative real estate market. Property prices have fallen sharply and remain unstable. Some developers have gone bankrupt, while others are in precarious situations. The real estate sector accounts for about 30% of GDP, and its poor health has a major impact on Chinese growth and confidence, as property is a significant component of their wealth.
The Chinese government, comfortable with growth in 2023, does not believe it is necessary to take significant economic support measures to vigorously stimulate domestic demand.
Geopolitical tensions with the United States, and now with Europe, over tariffs, bans on purchases of certain technologies (semiconductors) and restrictions on US investment in China also weigh on current sentiment.
Uncertainties stemming from the US elections in November cast doubt on how China will be treated, especially under a possible election of Donald Trump, who expressed his intention to further increase tariffs.

This lack of visibility deters investors from gaining exposure to the Chinese market and many are currently underweight. However, Chinese markets remain attractive due to attractive valuations, possible pro-consumer government measures, stock market support schemes (share buybacks, dividend payments) and opportunities with high quality companies, whether domestic leaders or expanding internationally.

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