Many investors are wondering whether it makes sense to invest in China in 2023. The country is still plagued by internal problems but despite this some analysts are optimistic.
Investing in the Chinese capital market is as interesting as it is controversial. While China displays a growing economy and listed companies have attractive P/E, the investment in the Chinese stock exchange can involve important risks for a careless investor.
How to invest in China
Investing in China is not exactly the same as investing in Western stock exchanges. First of all, it should be noted that there are three stock exchanges in China: the stock exchange of Shanghai, that of Shenzhen and Hong Kong. These represent in terms of capitalization the second largest financial reality globally, second only to Wall Street. Despite the size of the capital market, investing in China is by no means easy. If you decide to do stock picking, bear in mind that in China there are more than 5,000 stocks but only less than 800 have such technical characteristics that they can be included in a benchmark (index or ETF).
Most Chinese securities are therefore highly illiquid and deprived of a system of transparency such as to guarantee the reliability of the market, company or financial instrument in question . Without considering the fact that a foreign investor does not have the possibility to invest in all shares due to regulatory restrictions.
Looking at the sector indices, the most complete is the MSCI China Index , which represents the performance of the markets of Shanghai, Shenzhen and Hong Kong. The MSCI China 50, on the other hand, expresses the performance of the largest and most liquid 50 stocks listed on the Chinese market. In fact, many investors are mainly interested in investing in the country through ETFs that replicate the performance of the indices in question.
Why invest in China
China is going through a different economic phase than the one currently faced by Western economies. The reason lies mainly in inflation: both in Europe and in USA inflation, although decreasing, is clearly higher than the target set by the central banks. Inflation in China, on the other hand, is contained within the 2% threshold, which is why Chinese interest rates are cut instead of increasing.
For their part, Western economies seem to be increasingly moving away from the concept of stability: European and US economic growth has been artificially stopped and the prospects for 2023 are those of a recession. In China, on the other hand, there are no signs of a slowdown: the median forecast of experts regarding economic growth in 2023 is between 4% and 5%, a figure lower than pre-pandemic levels (6%) but still in line with the government target.
Furthermore, many managers have often shown themselves inclined to invest in China thanks to the statistical advantages deriving from keeping a small percentage of securities appearing in emerging markets in the portfolio. The reason is to be found in the total decorrelation with respect to Western stock markets. However, 2022 did not prove to be an extremely bullish year for the Chinese stock market: the Covid-19 pandemic is causing important complications both for foreign economies but also directly for the Chinese economy, which is very dependent on trade relations with the rest of the world.
The main problem of 2022 concerned the "zero-Covid" policy of Xi Jinping which blocked the activity of many factories, especially in the territory of Shanghai. But to date the Chinese government has taken a step back by easing the restrictions. Although this has caused an important increase in infections, especially around the Chinese New Year, experts are confident and optimistic about the future. In fact, many think that it is only a matter of time before the situation stabilises and everything can return to a state of production regularity. Finally, in fundamental terms, it should be considered that the recent regression of the Asian financial markets has also reduced the P/E of listed companies.
The risks of investing in China
Although the data show an overall stable situation, 2022 has led to many economic problems for China. Confidence and consumer spending regressed compared to the West due to lockdowns, the zero-Covid policy and government crackdowns in the tech and property sectors. Youth unemployment has reached 18% and citizens’ discontent has manifested itself through countless protests in the squares.
The data show a reduction in consumption and a reduction in demand of exports in Europe and the United States. One of the main fears related to the future of the country remains the pressure of the real estate market: the sales of apartments are constantly decreasing and the November 2022 figure showed a 30% less than in 2021. Investment in China also cannot ignore considerations related to the trade relationship with the first economy in the world, the United States. The performance of the Chinese stock exchanges therefore strictly depends on relations outside the country and a worsening of ties with Western economies could directly affect the share price. Looking forward, one must be careful whether or not the Chinese company they want to invest in has an interest for conflict with the USA. Similarly, internal political issues within the country are also a very difficult variable to evaluate: this is because government decisions are often unjustified and not very transparent. It would not be new if the government suddenly decided to make certain businesses illegal, putting entire sectors in difficulty, naturally always in the interest of the country’s growth.
Original article published on Money.it Italy 2023-02-02 16:17:00. Original title: Investire in Cina? Ecco cosa devi sapere
