CHINA’S stock market rally has attracted investors around the world, but recent turbulence has raised questions over whether now is the right time to invest.
After policymakers in Beijing unveiled an array of economic and financial support last month, Chinese equities skyrocketed to outperform all other global indices, triggering a wave of cash from those who feared missing out. Then on Wednesday (Oct 9), the stocks suffered their biggest drop in more than four years as traders grew impatient over the pace of the stimulus measures.
It is all fueling massive confusion over whether China – which has underperformed its global peers for years – is poised for a true comeback, with the Hang Seng Index of Chinese stocks listed in Hong Kong up roughly 25 per cent year-to-date.
Investors were closely watching Saturday’s fiscal policy briefing for more information about the government’s stimulus plans.
“To some extent, the stimulus measures already have worked,” said Steven Schoenfeld, chief executive officer at MarketVector Indexes in New York.
“The market has indicated this, even though it overshot last week. But the stimulus needs to be combined with more structural economic reforms, and a more positive attitude toward entrepreneurship and foreign investment.”
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No matter where you live, there are ways to invest in China right now. Here’s what you need to know:
What has been happening in Chinese markets?
The nation’s US$18 trillion economy has struggled to recover from a pandemic slump, with a debt crisis battering the property sector and consumer confidence plunging. Plus, a global backlash against Chinese goods is denting the prospects of the manufacturing sector, and unemployment is rising.
That’s all weighed on Chinese equities, sending its weight in emerging market indexes to a record low.
In response, China’s central bank unleashed a broad package of monetary stimulus measures last month to revive the economy. The central bank will also provide at least 800 billion yuan (S$147.8 billion) of liquidity support for the nation’s stocks, and officials are looking into setting up a market stabilisation fund. For major banks, authorities are considering injecting up to 1 trillion yuan of capital.
However, investors have grown impatient after a lack of urgency shown during a widely watched policy briefing in early October, while the steep moves during the rally has left the market in a fragile state.
What is the case for investing?
China has long been under-represented in global indices, and the valuations of its stocks are cheap compared to global peers, according to Brendan Ahern, chief investment officer at KraneShares, which offers the CSI China Internet Fund. It’s also an effective diversification for your portfolio, especially for those who have profited from US stock gains in recent years.
“The Fed is cutting and maybe there’s a recession coming, so why wouldn’t you take a piece of those profits and put it into cheap China?” he said. “There is a meaningful opportunity in the valuations.”
China’s representation in major stock indices still underplays the country’s significant economic potential, and given the strong rally after the policy announcements, Wednesday’s correction should not be a surprise, according to Schoenfeld. In fact, it just means investors can snap up Chinese equities at a slightly discounted price.
“If investors believe that government support is enough to put a bottom in the markets, then now can be a great time to buy,” said Noah Damsky, founder at Marina Wealth Advisors in Los Angeles.
What are the risks?
There are worries the stimulus effects might be short-lived, especially for the equity market. The economy is still sluggish for now, as the policy measures work their way through the system. Plus, China’s range of problems, including geopolitical tensions and real estate weakness, may overshadow any policy optimism.
“While the market rally could boost consumer sentiment in the near term, the continued property slowdown could continue to weigh on confidence and arrest the rally if additional fiscal stimulus measures don’t follow,” said Michelle Gibley, director of international research at the Schwab Center for Financial Research.
In the past, the Chinese government has worried about issuing large scale stimulus measures for fear of inducing any kind of speculative bubble, she said, so measures are likely to continue to be small and targeted.
Volatility this week also highlights the potential pitfalls of investing in Chinese markets, according to Damsky.
“Investors understand there is underlying instability, both economic and political, which explains why valuations can look misleadingly attractive,” he said.
How can I invest?
Buying shares of an exchange-traded fund is the easiest way to bet on a China comeback, especially if you’re a foreign investor. These funds can be purchased directly through your brokerage account and are typically low cost. Plus, it’s usually a safer bet than choosing a single stock.
In the US, some of the largest ETFs for China right now are the iShares MSCI China ETF (MCHI), tracking the biggest Chinese stocks, and the KWEB from KraneShares, which invests in Chinese tech companies.
There’s also the iShares China Large-Cap ETF and the Xtrackers Harvest CSI 300 China A-Shares ETF, which include large and mid-cap onshore stocks.
For those seeking more targeted exposure, there’s a newly issued ETF called the Roundhill China Dragons ETF, designed to follow an equal-weighted basket of five to 10 of the largest and most innovative Chinese tech companies.
If you’re based in the UK, some of the largest ETFs for China are the iShares MSCI China A UCITS ETF and the HSBC MSCI China UCITS ETF. For those in Hong Kong, there’s also the Hang Seng China Enterprises Index ETF and the iShares Core MSCI China ETF.
What do I need to be aware of as a foreign investor?
The abrupt policy shifts have taken even experts by surprise and can be especially difficult for overseas investors to follow. Schwab’s Gibley suggests starting with a small allocation to emerging markets, which includes China along with countries like Brazil and India, for even more diversification.
Meanwhile, Schoenfeld recommends investors mostly focus on larger-cap companies.
“As a foreign investor, you have to accept that you’re not going to understand all the underpinnings and all the activities,” he said. “But you would expect that the biggest parts of this stimulus would go to the larger, more liquid companies.” BLOOMBERG
