As the world’s second- biggest economy, China has long been a country of interest to investors.
Chinese stock markets have boomed in recent years but look less positive now because of unfolding events.
A resurgence of Covid, which had been suppressed there, has led to economists downgrading China’s growth forecasts.
Stock slump: Chinese stock markets have boomed in recent years but a resurgence of Covid has led to economists downgrading growth forecasts
Now, fears of a clampdown on business, particularly in the thriving tech sector, have sent share prices tumbling.
Tech unicorns Alibaba and Tencent — both popular choices for UK fund managers — fell 6 per cent and 12 per cent last week, before recovering slightly.
Meanwhile, the Shanghai Composite Index, a measure of China’s overall stock market, has fallen more than 2 per cent since the start of the year.
China-focused equity funds are down an average 19.2 per cent since February, with trusts falling even lower at 27.2 per cent.
The falls come after UK investors ploughed £638.9 million into China funds between last September and March this year.
So will Chinese stocks continue to fall? And what might it mean for investors?
The economic rise of China has been one of the biggest stories of the 21st century — and not just for investors.
As its economy has grown, reforms have slowly opened it up to outside investment. In Britain, China-focused funds have performed well, with many doubling investors’ cash in the past five years.
That said, Chinese stock markets are more restrictive than their Western counterparts and the country is still designated a riskier ’emerging market’.
The past year’s events have given investors a sharp reminder of just why that is. It all began last November, when Chinese authorities halted the planned initial public offering (IPO) of the Ant Group — the $300 billion e-commerce group whose founder, Jack Ma, had reportedly fallen out with China’s communist rulers.
The surprise move saw Chinese tech stocks fall 8 per cent in days, though this was eventually reversed.
This year, Beijing has stepped up its tough approach to business, promising to bring in tough new data protection rules for firms.
The Communist Party is also cracking down on the private education market, banning tutoring firms from making profits.
The moves are seen as President Xi Jinping reminding firms they should prioritise Chinese rules over foreign shareholders.
Whatever the truth about the crackdowns, investors seem to think they are not good news. Tech companies, in particular, have lost speed, with Tencent and Alibaba now down 24 per cent and 33 per cent since the beginning of January.
Companies in the hardest-hit sector — education and tutoring — have fallen 90 per cent, including New York-listed TAL Education.
Tech unicorns Alibaba and Tencent — both popular choices for UK fund managers — fell 6 per cent and 12 per cent last week, before recovering slightly
UK investors holding China-focused funds, Asia (excluding Japan) or emerging markets may have felt the impact of the sell-off.
In three months, Fidelity’s China Special Situations fund is down 16 per cent, while iShares Core Emerging Markets ETF is down 4 per cent.
And what of Scottish Mortgage Investment Trust, which has long advocated China’s tech sector?
Despite large holdings in Tencent and Alibaba, the trust has weathered the storm thanks to stronger performance elsewhere, including vaccine-maker Moderna (up 248 pc this year).
The trust is up 1.5 per cent on last month, though its price is still down (by 4 per cent) on its February high.
But the trust, like others, is still exposed to future uncertainty in China, so its price may drop if Beijing’s clampdown continues.
The August sell-off has confirmed what many investors think about China: that it’s a market influenced more by political decisions than by market economics.
For investors holding China funds, it could be a long wait to recovery. When the funds fell about 25 per cent in 2018, it took a year for them to make up their losses. Of course, that isn’t guaranteed.
Experts, though, agree that investors should have some exposure to China, even if just to diversify their portfolio.
‘We think a great starting point is to invest in countries relative to the weighting given to their stock market,’ says Vanguard’s James Norton.
‘This means having some exposure to emerging markets, of which China is an important part.
‘We know, over the long term, emerging markets can offer higher returns, but this comes with additional risk around governance.’
Investors looking for Chinese exposure won’t find this hard when it comes to UK-based funds.
Baillie Gifford’s China fund invests in retail and tech platforms, plus big alcohol firm Kweichow Moutai.
A £10,000 investment five years ago now is worth £21,600.
Of course, China remains a specialist, complicated market, so it should form only a small part of a larger, diversified portfolio.
Investors may want to reduce the risk further by getting exposure to Chinese shares through Asia or emerging market funds. These also invest in countries such as India, Taiwan and Korea.
JP Morgan’s Emerging Market Investment Trust backs Tencent, plus Indian giants Tata and Infosys, and Taiwan Semiconductor Manufacturing Company.
In five years, it has turned a £10,000 investment into £18,300 —and hasn’t taken a big hit from the China sell-off.
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