Is it a Good Time to Invest in China? | ET Money

China’s mega cap stocks, especially the Internet based ones, are beginning to show signs of life. Stocks of Alibaba, Meituan, JD.com & Baidu have all jumped by over 40% in the second half of March. And what’s really helped spruce up the Chinese stock markets were a series of statements made by China’s top economic officials assuring investors that the crackdown on Internet companies was nearing its end and it was their government’s intention to stabilize and support the capital markets. But having said this, a government-engineered reversal cannot remove the many macroeconomic headwinds that remain in play.

Chapters

00:00 INTRODUCTION
01:02 WHY IS CHINA A FOREIGN INVESTMENT MAGNET?
03:44 WHY INVESTING IN CHINA KEEPS GETTING HARD?
05:53 VALUATIONS
07:44 INVEST OR NOT - WHAT MARKETS SAY?
11:01 SUMMARY

WHY IS CHINA A FOREIGN INVESTMENT MAGNET?
Investing in China is not always easy, but there is no other country that can replace it. China is the world’s second largest economy with a GDP of 18 trillion dollars and a population of almost 1.5 billion making it a huge market for investors. China continues to offer a unique and irreplaceable environment for manufacturing. Chinese businesses are now challenging global players based in the United States, Europe and Japan in terms of innovation and experimental business models.

In numbers, China spends about 2.5% of its GDP on R&D which then helps them spawn enterprises in areas like robotics, artificial intelligence, etc. It’s a combination of these three factors & president Xi Jinping’s personal ambition of attracting foreign capital that has seen investors flock into China.

Now all FDI or foreign direct investment is not the same. The FDI that the United States receives is mostly in the form of M&A while the FDI that comes into China is mainly from greenfield investments which involves the building of new factories which serves well for that country.

WHY INVESTING IN CHINA KEEPS GETTING HARD?
The Chinese government & President Xi Jinping’s efforts to regain the trust of international investors face some serious hurdles. Firstly, the sudden crackdown on the country’s most profitable companies on what can be loosely defined as “disorderly capital” met with almost everyone’s disapproval.

This strangulation of Alibaba, Meituan, Didi Chuxing & others led to massive confusion and even until today, the regulators are yet to follow through on their recent promise of making policies more transparent and predictable.

The second hurdle is the geopolitical situation. The on-going trade friction between the US and China and China’s “positively skewed but neutral ties” whatever that means to Russia. A third hurdle facing investors is the re-emergence of the Evergrande crisis. And finally, there is Covid and China’s hard-line “zero Covid” strategy with complete lockdown of cities.

VALUATIONS
There is little doubt that Chinese assets are cheap with the MSCI China Index of stocks currently trading at its biggest discount to global peers in more than two decades. In contrast, the MSCI All-Country World Index trades at 2.8 times price-to-book which brings forth a compelling valuation argument in favor of China.

But if you look at it the other way, cheap valuations are cheap for a reason and in China’s case, it has a lot to do with the downsides. This last point is very interesting from a valuation standpoint.

INVEST OR NOT - WHAT MARKETS SAY?
The investment analyst community remains divided on the outlook for Chinese stocks. While Credit Suisse and Goldman Sachs have released thick reports on the investability of Chinese stocks, firms like Morgan Stanley & the Bank of America aren’t as optimistic as they continue to remain neutral for now. Now on the positive front firstly there is a lot of momentum going the way of Chinese stocks. What I mean is barring a handful of research houses, a recovery in Chinese stocks is one of 2022’s most popular calls being made amongst global investors. There is still the question of how much will the markets recover but China’s broader themes of a thriving consumer sector, green energy and becoming the world’s largest economy over the next decade are still intact.

A second positive I see with China is it’s going through a rich bout of inflation and the Federal Reserve is committed to raise interest rates about 5 to 6 times this year. Beyond monetary policy and economics, a third reason that gives China an advantage is a lower level of geo-political risk. The United States is a lot more deeply involved in global issues like the Russia-Ukraine conflict as compared to China which continues to play the neutral card