Should Chinese New Year prompt a new look at its stock market?

The new moon on 29 Jan marks the start of the Chinese lunar new year, which this time will be the Year of the Snake. Investors will be hoping for a repeat of the current year (the Year of the Dragon): the main index of Chinese stocks, the CSI 300, gained 18.3% in 2024, after a 9.1% fall the previous year. Please remember past performance is not a reliable indicator of future returns. 

But how can investors make an informed judgement about so distant, vast, diverse and mysterious a country? And if they are minded to put some money into China, how much should they invest and how should they go about it? 

Understanding China 

Professional analysts and economists struggle with this so it’s a tall order for individual savers. What we do know is that, after decades of extraordinarily fast economic growth, China has hit some severe obstacles in recent years. Perhaps the greatest has been the bursting of its property bubble, but there have also been regulatory crackdowns that have hit Chinese technology companies and unnerved investors.  

Last year saw some large injections of stimulus by the authorities but even those measures fell short of what was needed to turn the economy around, some analysts said. Then there were the trade wars with America during Donald Trump’s first presidency, which he has promised to reignite during his second term by imposing tariffs of as much as 60% on Chinese imports. 

Another problem for investors is that official Chinese economic data are widely doubted over suspicions that growth figures are massaged to coincide with government targets. And while the Chinese economy appears capitalist in many ways, the state has huge influence: many projects are financed by the various tiers of government and companies owned wholly or partly by the state play a big part in the economy. 

‘Economists, and top officials, have long questioned the accuracy of China’s gross domestic product (GDP) numbers, which … almost always hit annual government targets with uncanny accuracy,’ said a report in the Financial Times last week. ‘An economist at a Beijing university said many scholars believed the official GDP growth data was often inaccurate by up to plus or minus 2 percentage points, but in the past two years the distortion had grown,’ the FT report added. Official figures released last week put Chinese growth at 5% in 2024. 

How does China’s stock market work and what is its valuation?  

China has three main stock markets, in Shanghai, Shenzhen and Hong Kong (there is a smaller one in Beijing). The CSI 300 index only covers companies listed on the Shanghai and Shenzhen exchanges, although many companies based in mainland China, especially those that want to attract foreign investors, are listed in Hong Kong. Some are listed both there and in Shanghai or Shenzhen. To complicate matters further, some Chinese businesses are listed in New York (one, Shein, the fast fashion company, is even considering a London listing). 

The price-to-earnings ratio of the CSI 300 Index is currently 12.6 and the dividend yield is 2.7%, according to Goldman Sachs, as at 17 January 2025.  

What are the prospects for China’s economy and stock market? 

Fidelity’s Tom Stevenson, in his Investment Outlook published earlier this month, wrote: ‘Things have arguably got a whole lot more difficult for Asia and emerging markets since the US presidential election. Tariffs, a strong dollar and higher US bond yields are not a recipe for outperformance. Earnings growth is likely to be lower and valuations will be under pressure too. In the key regional market, the Chinese authorities are expected to respond with increased stimulus. It was hopes for this that triggered the dramatic rally in share prices in September but subsequent market volatility has reflected doubts about the pace and scale of support.’ 

Dale Nicholls, manager of the Fidelity China Special Situations investment trust, said last month: ‘Weak consumer confidence has been a feature of the Chinese economy since the pandemic, partly driven by the troubled property market but also by employment and wage concerns. Our sense from discussions with many companies on the ground is that we have now most likely seen the worst of the job cuts, particularly in areas like the big technology companies. Coupled with the policy support for the real estate sector, there is meaningful scope for confidence to gradually improve. 

‘Of course, geopolitical worries persist, especially around US tariffs on Chinese goods, which are likely to increase following the US presidential election. However, investors and companies are well aware of this prospect. Chinese companies have been dealing with tariffs and import barriers for some time now. In fact, some of the export-focused companies we see on the ground have remained extremely competitive.’ 

However, Goldman Sachs, the investment bank, recently cut its forecast for Chinese companies’ earnings growth from 12% to 8% a year. 

How to invest in China 

Even though China is the world’s second-largest economy it is still regarded as an emerging market, which makes it inherently riskier for investors than more established countries. Then there is always the possibility of state intervention in certain sectors of the economy, which could be detrimental for the share prices of companies affected. In addition, standards of corporate governance in China are regarded as lower than in western countries. For these reasons, financial advisers recommend only limited exposure to China within a balanced portfolio. A maximum of 5% of your money in China would be a rough yardstick. 

The Fidelity Select 50 list of our favourite funds, independently compiled by analysts at Fundhouse, does not contain any funds that invest exclusively in China, but it does include six emerging market or Asia funds, whose exposure to China varies from 29.9% of assets (Fidelity Asian Smaller Companies) to 9.1% (Stewart Investors Asia Pacific Leaders).  

However, the Fidelity fund has a further 12.8% of its money in Hong Kong-listed stocks, while the Stewart Investors fund has 2.4% exposure to Hong Kong. If you would like more limited exposure to China, a global fund is one option. The Select 50 includes seven such funds. For example, the Dodge & Cox Worldwide Global Stock fund has 3.9% of its money in Chinese stocks. Figures are from Datastream and as at the end of December. 

Past performance is not a reliable indicator of future returns 

Source: Refinitiv, total returns in local currency from 31.12.19 to 31.12.24. 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.