La Française: Why don’t investors invest more in China?

La Française: Why don’t investors invest more in China?

23 juli 2024

China
China.jpg

Investing in Chinese listed companies generates some skepticism among investors. Indeed, since the end of 2020, Chinese stock markets have not been performing well. Several reasons explain this underperformance:

1. Since late 2020, Chinese authorities have significantly tightened regulations in several sectors, penalizing internet, education and pharmaceutical companies. These more restrictive laws have heavily weighed on certain stocks and dampened investor sentiment due to the uncertainty they create.

2. China took longer than other countries to recover from COVID-19. The reopening effect was not as significant as expected, with consumer confidence in the Chinese economy shaken and high unemployment rates encouraging savings over spending.

3. The wealth effect among the Chinese population has been significantly impacted by a major real estate crisis in the country. The Chinese government aimed to stabilize what it deemed as an overly speculative real estate market. Property prices have dropped sharply and remain unstable. Some developers have gone bankrupt, while others are in precarious situations. Real estate accounts for about 30% of GDP, and its poor health has a major impact on Chinese growth and confidence, as property is a significant component of their wealth.

4. The Chinese government, satisfied with growth in 2023, does not see the need for significant economic support measures to vigorously stimulate domestic demand.

5. Geopolitical tensions with the United States, and now Europe, over tariffs, bans on purchasing certain technologies (semiconductors) and restrictions on American investment in China also weigh on sentiment.

6. Uncertainties stemming from November US elections cast doubt on how China will be treated, especially under a potential election of Donald Trump, who expressed intentions to further increase tariffs.

This lack of visibility discourages investors from exposure to the Chinese market, with many currently underweight. However, the Chinese market still holds appeal due to attractive valuations, potential government measures favoring consumption, support plans for the stock market (share buybacks, dividend payments), and opportunities with high-quality companies, whether domestic leaders or those expanding internationally.

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