Is China a good investment now?
Why has the index performed so poorly over so many years?
Due to its skilled labor pool, remarkable infrastructure, and continual investments in a modern manufacturing base built for future industries, China offers unparalleled market growth potential.
In 1992, the tickers in China’s A-Share should be no more than 30, and the early constituents of the MSCI China Index failed to capture diverse representation from all sectors. Before 2002, the index kept decreasing. The reasons are because, on the one hand, the Chinese stock market was influenced by the dot-com bubble between 1995 and 2001. On the other hand, it had restrictions on foreign investments, and it is not a free capital market.
After a major reform in 2002, along with the benefits of joining the WTO, a burgeoning export market and looser investment restrictions led to growth in the Chinese capital, especially in the energy and real estate industries. It resulted in an astounding growth of the Chinese equity market.
After 2008, the global economy entered a long cycle of recession.
Most Chinese manufacturing companies, which have a large sector weight in the MSCI China Index, had to bear the increase in production cost caused by the dollar’s QE policy.
At the same time, influenced by the long cycle of recession, the gross rates and the net profits kept low. In addition, Chinese companies faced price competition from the south and southeast Asia. Before 2018, the Chinese economic growth was mainly driven by the real estate industry in the investment field and the consumption industry, which tends to be fatigued and weak.
The above reasons led to great fluctuations in the Chinese equity market.
The pandemic in 2020 had a great influence on the global economy. China recovered faster than the other major economic entities and maintained a large share of global exports. Meanwhile, more cash flow entered the market from individual investors.
However, after 2021, the global pandemic became more manageable. So, China’s central bank didn’t follow the QE policy as the US Fed did. As a result, the temporary boom in the equity market faded away.
Additionally, regulatory threats on both sides of the Pacific targeted Chinese high-tech companies, like Tencent, Alibaba, Meituan, etc.
Those companies are in the top constituents list of the MSCI China Index, which exacerbates the index’s performance after 2021.
In conclusion, the past 30 years have witnessed the second half of the Chinese economic boom period (1992-2010) and the beginning of the economic depression (2011-present). The overall index performance fails to match the macroeconomic growth.
During the past 30 years, the structure of the Chinese economy has changed considerably.
The index construction is extremely untimely in tracking China’s economic trends. Accordingly, the MSCI China Index has provided nearly zero returns since 1992. While the cumulative returns of many actively managed public funds in China are very high.
On a positive note, China is a developed nation looking to lower interest rates and add quantitative easing actions for its economy.
Travis Luo, Ziqi Wang, Avhan Misra, Jimei Shen
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Is China a good investment now?