Growth in China has stalled for now and debt continues to grow, the team at Freetrade noted in a blog post. And recent direct intervention has considerably boosted volatility in Chinese stock markets, the Freetrade team noted while adding that potential investors should now be cautious of the “fear of missing out.”
According to the update from Freetrade, China’s in some trouble. It’s notably the second largest economy in the world, and it’s “unlikely to lose that spot any time soon.” However, Freetrade pointed out that it’s undeniably facing considerable challenges.
Freetrade further noted that fast growth over the last few decades has slowed. Its ageing population and “falling birth rate” could make China’s debt problem even worse. Freetrade also mentioned in their update that this is quite concerning for a nation presently “dealing with debt levels over 250% of GDP.”
Freetrade added that the last few weeks were supposed to offer some certainty.
The Fintech firm further noted that the Chinese government announced it was eager to boost the economy, and investors have been waiting with “bated breath for the details ever since.”
But during what was supposed to be a clarifying press conference last weekend, Finance Minister Lao Fo’an “failed to shed more light on the plan.”
With all of this uncertainty, Chinese stocks have been on “a non-stop rollercoaster for the past two weeks.”
China’s stock market hit record highs not seen in years, then endured their “worst fall in 27 years.”
It’s clear that the markets “want more clarity.”
As an investor, the best and hardest thing to do “is to take a step back.”
Getting caught up in short-term issues “can lead to poor investment decisions.”
Given the continued lack of clarity around stimulus plans, investors need to “consider the state of the Chinese economy, its place in the world, and how decisions taken around the world affect it.”
This approach can offer much-needed perspective to make “a rational assessment of the risks and possible rewards of investing in China.”
Freetrade shared reasons to invest in China as follows:
- Growth at all costs: While some experts say China may not meet this year’s growth target, Beijing insists it will. It’s feasible that China will only be able to meet its 5% growth target if the country musters up a hefty list of new measures to boost consumer and producer confidence. This could suggest that they plan to create a generous spending plan for increasing the country’s demand.
- Consumer spending rebound: If the upcoming stimulus package is indeed bigger than expected, then government debt would increase, but household debt as a percentage of earnings could fall. For Chinese households this figure has been rising, so a change is needed to prevent consumers from running out of cash.
- Government investment: As a major player in infrastructure, China’s decisions about how to deal with debt and infrastructure spending will impact industries worldwide. If consumer demand goes up, demand for commodities to fuel that demand will also rise. China is the biggest importer of crude oil and other raw materials in the world, so it certainly has the power to swing prices.
Risks of investing in China
- Geopolitics: China has a highly complex relationship with the US, and tensions with Taiwan remain high. It’s a highly unpredictable landscape, and investors should keep up-to-date with international developments threatening to impact the market’s stability. Dynamics can change on a dime.
- Regulatory crackdowns: On several occasions, the Chinese government has imposed strict regulations to curb growth in certain powerful industries. For instance, two of the country’s biggest companies, Tencent and Alibaba, were hit with hefty penalties for fostering “unfair competition” in the country. Neither has recovered to pre-crackdown valuations. Future actions along these lines are a serious risk to investors.
- Slowing growth: As mentioned, China’s debt is rising, and growth is slowing. Outsized borrowing in the property sector has caused problems for governments at all levels, as well as consumers. A former deputy head of the National Bureau of Statistics explained that some estimate the country has enough vacant homes up to 3bn people. With too many properties, and not enough buyers, there are mounting concerns about the sustainability of China’s economic model. Short of significant direct government intervention, the market could be in for a challenging decade or more.
Freetrade has also shared how UK investors may get exposure to this massive economy.
These options offer different levels of “exposure and risk.”
In general, if you invest in individual stocks based in China, you take on “more risk than with a fund or trust, which will manage some (but not all) of the risk of overexposure to single companies or industries with diversification.”
If you invest in commodities or key global industries that are impacted by Chinese demand, your investment performance will be driven by “a number of factors impacting these global markets, not simply China’s economic fortunes.”
Diversified funds may be more suitable for “most investors,” however they are also “not without their own risks.”