Is investing in China a good idea?
In 1992, the tickers in China’s A Share would be no more than 30. Moreover, the constituents of the MSCI China Index had a lack of representation at the beginning.
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’s not a free capital market.
After a major reform in 2002, with the benefits of joining the WTO, a burgeoning export market and looser investment restrictions led to growth in the Chinese capital, especially in 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 companies manufacturing, which has a large sector weight in MSCI China Index, had to bear the increase of 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. Chinese companies faced price competition from the south or south east Asia. Before 2018, the Chinese economic growth was mainly driven by the real estate industry. Furthermore, the investment field and the consumption industry tended to have fatigue and weakness. The above reasons lead 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 into the market from individual investors.
However, after 2021, the global pandemic became under control. China’s central bank didn’t follow the QE policy as the US did. And the temporary boom in the equity market faded away.
And there are regulatory threats on both sides of the Pacific towards 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 performance of the index after 2021.
In conclusion, the past 30 years include the second half of the Chinese economic boom period (1992-2010) and the beginning of the economic depression (2011-present).
The overall index performance doesn’t match the macroeconomic growth. During the past 30 years, the structure of the Chinese economy has changed a lot. I think the index construction is extremely untimely in tracking China’s economic trends. That’s why the MSCI China Index provided nearly zero returns since 1992 while the cumulative returns of many actively managed public funds in China are very high.