The China stock market faces challenges but there are still opportunities for investors

Content by Fineco's partner

The China stock market faces challenges but there are still opportunities for investorsThe China stock market faces challenges but there are still opportunities for investorsThe China stock market faces challenges but there are still opportunities for investors

Concentrated power, a government crackdown on technology and a zero Covid policy are just some of the challenges to face China in 2022. China funds have suffered as a result but there are signs of improvement and in 2023, opportunities for investors remain.


Invest in ChinaChina fundsChina stock marketInvest Hong Kong

7 min reading

2022 was a tough year for investors in China. It took its place alongside technology and smaller companies among the worst performing sectors. Investor confidence slumped, with many worrying about an existential threat to China’s role in the global economy. Yet, for 2023, it is difficult to ignore the long-term growth potential of a developing country with 1.4bn people.

2022 was a difficult year for China’s stock market

The average China/Greater China fund was down over 22% for the year to early December. This might not have been so bad, but Chinese equities had already been weak in 2021, leaving investors nursing significant cumulative losses. There were multiple contributing factors for this weakness. The first was that valuations had got very high, particularly in the country’s dominant technology sector. When the government outlined plans to impose greater regulation on the sector, it sent share prices tumbling.

There were also problems in the highly-indebted property sector. In 2021, the country’s second largest developer Evergrande . As the sector tumbled through 2022, several major companies sought bankruptcy protection. There were fears that the weakness in the sector would stall growth in the Chinese economy.

The country has also struggled to shake off Covid. Its strict zero-Covid policy has seen continued lockdowns and disruptions to manufacturing. Late November 2022 saw protests against the ongoing restrictions to freedoms. This has hurt economic growth. While the IMF was still predicting in October growth of 3.2% for 2022, that is some way below the 6-7% that investors have come to expect.

The final problem has been one of perception. In October’s party congress, Xi Jinping was confirmed as leader for a third term, consolidating his power. This worried investors who believe the move towards one-man rule after decades of power-sharing could reverse the country’s economic progress.

China has also shown itself to be a friend to Russia during the Ukraine crisis, which has inflamed an already tense relationship with the US. It is clear that the US will no longer be a fertile market for Chinese goods, and technology intellectual property will no longer be freely shared.

Will 2023 be a good year to invest in China?

Some of the problems that have blighted Chinese markets are losing their sting. A rescue package for the property market has helped reverse a crackdown on lending to the sector. The 16-point plan allows banks to extend maturing loans, reduce deposit requirements and target other funding channels, such as credit markets. Shares in Chinese property companies rallied on the news.

Equally, despite the recent unrest, the situation on Covid appears to be broadly improving, with signs the long-running zero-Covid policy may be easing. The government is rolling out more effective vaccines and treatment options, including an inhalable vaccine. The country does not yet have its own mRNA vaccine but appears to be making progress towards one.

In the meantime, the economy appears to be resilient – industrial output remained strong, rising 5% in the year to October 2022. Retail sales dropped, but this reflected a period when Shanghai was under full lockdown. Fixed asset investment also continued to expand. 

The position of Xi Jinping is worrying. Concentration of power in a handful of individuals has seldom led to good outcomes. That said, for the time being, the government has been relatively sensible in its economic agenda. It has clamped down on those companies perceived to be doing social harm, such as social media groups, and sought to direct capital to ‘common prosperity’ targets, such as improving clean energy, raising efficiency and reducing emissions. There appears to be a recognition that the government needs to improve people’s lives to stay in power.

There are also areas of significant innovation. China has been a pioneer in social media but is also leading the way on some environmental technologies. Chinese robotics markets are growing, with installations rising.

There are signs that sentiment is becoming marginally less negative

Valuations were looking more appealing in the Chinese stock market towards the end of 2022 and it saw a recovery between the end of October and the end of November, with the MSCI China gaining around 25% from its lows.

Investors have a number of routes into China’s stock market. They can either invest through Hong Kong (‘H’ shares) or the domestic Chinese market (‘A’ shares). Most diversified China funds and investment trusts will hold a mix of both. Investment trusts specialising in China have recently been trading at significant discounts to their net asset value and this may represent an opportunity. If China’s stock market were to recover through 2023, investors could benefit from a narrowing of the discount and an uplift in the share price.

Using a general emerging market fund may also be an option. China has become a larger part of the global emerging market indices in recent years, and now makes up more than a quarter of the MSCI Emerging Market index. Investors in emerging markets funds are likely to have a significant chunk of their investment in China anyway. ETFs are also an option, with ETFs available on both the ‘A’ and ‘H’ shares market.

China has had a tough period and investors may be disillusioned. The country’s political set-up may also give investors pause for thought. However, there are still opportunities to invest in China as the country grows, innovates and matures. It is leading the world in certain key sectors. It will continue to throw off opportunities and, after a period of significant weakness, prices are undemanding.

As you build and manage your portfolio, the Fineco platform offers the tools, resources and investment options to help you keep track of what’s happening in markets around the world, including in China and Hong Kong.

Information or views expressed should not be taken as any kind of recommendation or forecast. All trading involves risks, losses can exceed deposits.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62.02% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Before trading CFDs, please read carefully the Key Information Documents (KIDs) available on the website

Fineco Newsroom is a compilation of articles written by our editorial partners. Fineco is not responsible for an article's content and its accuracy nor for the information contained in the online articles linked.

These articles are provided for information only, these are not intended to be personal recommendations on financial instruments, products or financial strategies.

If you’re looking for this kind of information or support, you should seek advice from a qualified investment advisor.

Some of the articles you will find on the Newsroom feature data and information from past years. As per the very nature of the content we feature in this section of our website, some pieces of information provided might be not up to date and reliable anymore.

This advertising message is for promotional purposes only. To view all the terms and conditions for the advertised services, please refer to the fact sheets and documentation required under current regulations. All services require the client to open a Fineco current account. All products and services offered are dedicated to Fineco account.