The British Center for Economic and Business Research believes that in 2028 China’s economy will become the largest in the world.
Now China is growing faster than the United States and Europe and was the first to recover after the first waves of the pandemic. Against this background, investing in China seems promising.
In this article I will tell you whether it is really profitable to keep Chinese stocks in a portfolio and how best to do it.
Why it’s worth buying Chinese stocks
Many large corporations keep their production facilities in China because of cheap labor. But the “factory of peace” model is losing effectiveness due to trade wars, rising wages in the country and disruption of supply chains during the pandemic. Gradually, companies are withdrawing production from China to other countries.
Having discovered such unpleasant changes, the Chinese authorities focused on their own innovations. Especially in electric cars, green energy, robotics, the Internet of things. The state supports IT companies in these areas, so they become attractive to investors. Among the fast—growing companies are Li Auto, NIO, Tencent, Alibaba, JD.com , Baidu.
China is also trying to control stock market bubbles. The authorities have specifically reduced monetary incentives to avoid overheating the market. For comparison, the US continues to print money and increase liquidity in the market, which contributes to inflation and the collapse of stocks.
While inflation in the US and Russia will strengthen, the Chinese yuan will rise against the dollar and ruble. This is another reason to invest in China. In addition, many Chinese stocks adjusted to very attractive prices when they fell by 20-40%.
What are the risks of investing in China
Investing in China is becoming dangerous mainly because of the policy of the Chinese authorities. There are five major reasons that are alarming:
- Conflicts between the USA and China. The crisis in relations between these countries has been going on for a long time, and the United States has even banned American investments in 59 Chinese companies related to defense and intelligence.
- The opacity of the reporting of Chinese companies. Companies often change their structure and operating principles without notifying investors.
- The socialist system and increased state control over the economy. The laws are guided by the course of the party, and it is impossible to predict where the party will turn tomorrow.
- China’s large domestic debt. It is the second largest after the USA. Failure to pay the debt leads to defaults and crises.
Restrictions of the legislation of the People’s Republic of China in relation to foreign investors. Since it is impossible to invest in Chinese companies directly, when you buy shares, you do not become the direct owner of the company’s share, but get a share in an offshore intermediary company. This structure is called VIE, legally it complicates the protection of investors’ rights.