Chinese stocks are set for a bumpy ride

“Should you be investing in China?” asks Ali Hussain in The Sunday Times. Global investors have withdrawn £5.4bn from funds investing in Chinese stocks in the past month. Worsening relations with Washington and Beijing’s clampdown on Hong Kong are causing some to reconsider their positions.

The long road to recovery

Chinese stocks have held up well during the pandemic, with the Shanghai Composite index down just 4% on the year. It has rallied 11% since the most recent low on 23 March. China was the first major economy to enter a Covid-19 lockdown, with reported cases peaking in mid-February. That contributed to an annualised 6.8% fall in GDP in the first quarter, the first decline since the 1970s.

The crisis has prompted officials to scrap the annual growth target, which was set at 6%-6.5% in 2019. The obsession with targets has led to “much wasteful investment” and “some book-cooking”, says The Economist.

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The recovery has been uneven, says Miguel Chanco of Pantheon Macroeconomics. Factories and construction are up and running again, but “consumers appear to be staying away from the high streets”, with passenger numbers on the Beijing metro system still 30% below pre-virus levels. Consumption accounts for just over half of Chinese GDP.

Chinese stimulus was a key driver of the world’s post-2008 recovery, but contributed to dangerously high debt levels. A recently announced ¥5.8trn (£640bn) package is much more modest than previous efforts.

The Chinese growth conundrum

US-China decoupling is spilling over into financial markets, says Yusho Cho for the Nikkei Asian Review. Under pressure from the White House, the Thrift Savings Plan, a US government retirement fund, last month suspended investments in Chinese stocks. The move has dealt a “psychological blow” to other foreign investors and could be a harbinger of a broader US-led investment clampdown.

Yet pension funds need to generate returns and many managers are looking to China to deliver them. “China is where the growth” is, Olga Bitel of wealth manager William Blair tells Reshma Kapadia in Barron’s. In an uncoupled world, diversified investors will want exposure to both American and Chinese tech gains.

Yet a “perfect storm of economic and political risks” is prompting a reassessment of the China growth story, says Hussain. The growth narrative always had flaws, says Russ Mould of AJ Bell. The economy has “probably doubled ... since 2005”. Yet the Shanghai Composite index peaked at 6,092 in October 2007. Today it is still below 3,000. Nevertheless, there are other ways to play China and World Bank data shows that Chinese GDP per capita sits at $9,770 per person, comparable to Mexico and Turkey. That means there is still plenty of room for “catch-up” growth with rich countries. The sheer size of the economy makes it impossible for long-term investors to ignore – but growing geopolitical tensions could mean markets are in for a bumpy ride over the next few months.