After the long-awaited lifting of lockdown restrictions in January, the market predicted that the Chinese consumer would spearhead the economic recovery. This was fuelled by a surge of pent-up demand and record levels of household savings accumulated during the lockdown.
But consumers have opted to prioritise saving over spending. In fact, saving rates as a proportion of disposable income are almost three times as high as in the US and five times as high as in the UK.
Meanwhile, as many economies struggled with inflation, weak demand has seen China teetering on the edge of deflation, with year-on-year price changes stagnating in June.
Chart showing headline inflation* (% change year on year)
Source: J.P. Morgan, Guide to the Markets, as at 10 July 2023. *UK and US data for June 2023 is to end of May 2023.
As the economy continues transitioning from manufacturing-based to technology and services-driven, rising youth unemployment has also dominated the headlines. In May it reached a staggering 20.8%, marking the highest level since 2018.
It's no surprise it's been a tough year so far for the Chinese stock market. The FTSE China index has fallen 14.16% versus a 7.85% rise for the FTSE All World Index.
But while disappointing for investors, this disconnect could now offer a good entry point. Here are two reasons why.
Firstly, China looks attractively valued compared to historic levels and other global stock markets, especially the US. This could add some useful diversification to a portfolio.
Secondly, policymakers are likely to be supportive. We've already seen the central bank begin to cut interest rates in a bid to ignite the economy. The market is also anticipating further measures to help shore up confidence.
Positioning China as a global leader
The long-term case for China is still very much intact. With a large population, rapidly growing middle class, and ambitious economic reforms, China offers a compelling opportunity for investors.
China is making waves on the international stage. The country is actively investing in infrastructure, technology, and innovation. It's positioning itself as a global leader in various industries, from e-commerce giants and renewable energy to advanced manufacturing and artificial intelligence.
With careful research, understanding of local dynamics, and a long-term perspective, investors can tap into the enormous potential that China offers.
This article isn't personal advice. If you're not sure whether an investment is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.
How to invest in China – 3 fund ideas
Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, they understand the specific risks of the fund before they invest and make sure any new investment forms part of a diversified portfolio invested for the long term (5 years or more).
For more information on these funds including their risks and charges, please look at the key investor information and online factsheets linked below.
All these funds invest in emerging markets which are generally less well-regulated than the UK and it can sometimes be difficult to buy and sell investments in these areas. Political and economic instability are more likely, making these funds higher risk than those investing in more regulated and developed markets.
FSSA Greater China Growth
Martin Lau, lead manager of the FSSA Greater China Growth fund, invests in high-quality companies with strong cash flows, an ability to keep costs under control and high standards of company management.
This fund focuses on the Greater China region, and invests in companies based in, or that carry out most of their business in, China, Hong Kong or Taiwan. The fund mainly invests in larger companies, it can also invest in some higher risk smaller companies.
More about FSSA Greater China Growth, including charges
FSSA Greater China Growth Key Investor Information
Abrdn Asia Pacific Equity Fund
Flavia Cheong leads the team of five that manage the Abrdn Asia Pacific Equity fund.
Their investment philosophy is based on 'long-term quality'. They believe most investors underestimate the sustainability of returns that many high-quality companies can make. They aim to find companies which can generate long-term growth, which have been overlooked by others and hold onto them for many years.
Around a quarter of the fund is directly invested in China and also provides access to a range of emerging and developed Asian markets. The fund invests in smaller companies, which are more volatile and sometimes more difficult to trade than larger companies.
More about Abrdn Asia Pacific Equity Fund, including charges
Abrdn Asia Pacific Equity Fund Key Investor Information
Vanguard FTSE Emerging Markets ETF
The Vanguard FTSE Emerging Markets ETF offers a low-cost option for tracking the performance of the FTSE Emerging Index.
The index offers exposure to a range of large and medium-sized companies in emerging markets which includes around a third in China. Index funds can sometimes lend stock and use derivatives which may increase risk.
More about Vanguard FTSE Emerging Markets ETF, including charges
Vanguard FTSE Emerging Markets ETF Key Investor Information
Learn more about ETFs
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Our fund research is for investors who understand the risks of investing and that investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
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