How to invest in China

Invest in the middle of the trade dispute in China? That sounds crazy, but it’s not a bad thought at all.

Anyone who dares to go to China must know that high price fluctuations are the order of the day.

EThere are many countries in the world that would be happy to receive such news: China’s economy grew by six percent between the beginning of July and the end of September, the authorities said on Friday. That sounds like a mature achievement, but by Chinese standards it is a disappointment. You have to go back almost 30 years to come across a quarter in which the economy has moved similarly slowly.

It sounds crazy to invest your money in China, of all times. Especially since one reason for the poor performance of the Chinese has to do with the conflict that has kept the world in suspense for some time: the trade dispute between China and the United States. Even if America’s President Donald Trump announced a rapprochement in the dispute, as usual, the more prudent part of humanity knows only too well that the matter is far from over.

The fact that some fund companies are still beating the drum for China is therefore initially suspicious. For the sake of good business, companies must always look for new trends that they can make attractive to investors. On the other hand, the fact that they are trying to deal with the difficult topic of “China” these days of all times also shows that this is more than pure marketing talk, but rather due to serious considerations.

The China quota of the funds

There is no other way to explain why a major investor like Singapore’s state fund Temasek invests a good quarter of its money in China. “The tensions between China and America will remain for a while,” said Tan Chong Lee, one of Temasek’s leading portfolio managers. “But we are convinced of China’s long-term economic dynamism.”

The trouble with this belief is that it can only be verified in the future. But it is a mixture of fundamental considerations and the consequences of the trade conflict that make Chinese stocks interesting despite everything. To start with the basics, China is the second largest economy in the world by economic performance after the United States.

In important equity barometers such as the MSCI All Country World, however, Chinese companies only have a share of less than four percent. The fund company Franklin Templeton comes to a similar conclusion in an analysis of the largest mixed funds in the world, which invest in both stocks and bonds.

Underweight China in most portfolios

Only six percent of their money is currently in emerging countries, which China still counts in financial market terminology. The funds’ China quota only makes up a small proportion of these six percent. Templeton expert Marcus Weyerer draws the conclusion: “Given the size of its economy, China is underweighted in most portfolios. Investors are missing out on the opportunity to participate in the country’s growth. “

Investors’ shyness could just as easily be interpreted as wise reluctance out of fear of the trade conflict. But interestingly enough, this conflict opens up opportunities. The first is that the Chinese are now relying more on products from their own country than before. It is even the declared aim of the Chinese government to reduce dependence on foreign countries and to increase domestic consumption.

This could also boost the share price of some Chinese companies, even if not a few of them suffer from high debt. But consumers would even have the leeway to increase their own spending. Because the Chinese save more than other peoples, on average they save 45 percent of their income. Once they choose to spend just a little more, it will stimulate China’s economy.

A second chance resulting from the trade dispute has to do with China’s technology corporations. The smartphone manufacturer Huawei, for example, is currently suffering from the American sanctions. But at the same time, this could trigger a new boost in development in China, as the fund company Alliance Bernstein suspects. In any case, China’s best-known Internet companies Alibaba and Tencent overshadow established DAX companies in terms of their market value.

The easy way for German investors

It is easiest for German investors to invest in China through funds. A distinction must be made here: Some new index funds (ETF) that replicate the performance of Chinese stocks include so-called A-shares on a larger scale. These are stocks often from the Shanghai Stock Exchange that were previously only reserved for the Chinese, they are suitable for more courageous investors.

Franklin Templeton has just launched such an ETF with the “Franklin FTSE China” (ISIN: IE00BHZRR147). The “Lyxor MSCI China” (ISIN: LU1841731745) has fewer A shares. He is increasingly relying on companies that are listed on the Hong Kong Stock Exchange. If investors prefer traditional fund managers, they can invest in “HSBC Chinese Equity” (ISIN: LU0039217434), but the fees are higher.

Anyone who dares to go to China must know that high price fluctuations and government intervention in the stock market are the order of the day. Perseverance, however, has been rewarded in the past. In dollars, major Chinese stocks have increased almost fivefold in value since 2004.