Should U.S. Investors Avoid China?

China has long made headlines in the U.S., typically negative, ranging from unfair trade practices to allegations of human rights abuse. Recently, China’s been in the spotlight again, particularly among investors, for its regulatory crackdown on technology and education companies, which has caused large losses for shareholders. China is a world away—geographically, culturally, and politically—so it is often difficult to understand new developments there, let alone forecast its future. Yet, China is too important to ignore. It has the world’s second largest economy and capital markets, including world-class technology companies.

Their technology companies were the first targets of the Chinese Communist Party’s regulatory crackdown. Late last year, China shocked markets when they stopped what would have been a record-breaking IPO by Ant Group (a Chinese financial technology company), just a few days before it was scheduled to begin trading. Since then, the regulatory tightening has spread to other technology companies involved in ride-hailing, music streaming, and online gaming, as well as private tutoring companies.

China may be shifting its priority from capitalism to socialism as it seeks to promote common prosperity. Some worry the regulatory tightening will continue for years, especially considering the new five-year plan that China unveiled on August 11, which calls for strengthening legislation in important areas including technology, education, and public health.

Others view recent events as a mere bump in China’s 40+ year trend of developing a market economy, capital markets, and innovative technologies. What China has accomplished over the last few decades is nothing short of an economic miracle, and this isn’t the first time China has surprised markets with sudden reforms. Some would even argue that recent regulatory clampdowns were largely warranted—and even consistent with U.S. laws—as they targeted things like price discrimination and monopolistic behaviors.

Regardless of the Chinese government’s motives, the crackdown has spooked investors. So far this year, Chinese stocks are down -15.0%¹. This decline has caused some investors to reconsider their allocation to a country where there is so much regulatory uncertainty, not to mention geopolitical tensions, high private sector indebtedness, and troubling demographics. Some shareholders may want to avoid China completely for social or other reasons. We understand those concerns and can accommodate that preference in building out a more customized equity solution if desired.

It’s important to remember that, like all countries, the Chinese economy and market have risks and opportunities. The equity market exposure we recommend at Blue Trust is informed by three investment pillars: economic growth, valuation, and diversification. Economic growth in China certainly qualifies as above average with the government targeting a 6%+ rate going forward. Past rates have been even higher. Last year, China was the only major economy that achieved positive growth, even though China didn’t provide nearly as much stimulus as many of its peers. This year, despite signs of slowing, China is still expected to grow at least 8%. In many other parts of the world, growth is slower, inflation is higher, and valuations are higher. Given the unique characteristics of China’s systems, it is also likely to help diversify investment portfolios, especially as the U.S. and China increasingly decouple.

As the second most important country in the world—economically, technologically, and geopolitically—and as a strategic rival of the U.S., whatever happens within each country and between them will have far-reaching effects on the world. Thus, we believe our clients can benefit from having exposure to both countries. How much exposure will depend on investor preferences, like those around tracking U.S.-centric benchmarks.

If you need assistance and would like to talk to a Blue Trust advisor, please contact us at 800.987.2987 or email blog@bluetrust.com.

¹ As of 8/27/21
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