Donald Trump has been back in the White House for just over a week as China ushers in the year of the snake. And there’s no doubt some will see that as fitting, given the potential for the second Trump presidency to inject fresh venom into the relationship between the two countries.
While there are plenty of reasons for optimism when it comes to China’s investment prospects, Trump’s return casts a potential shadow over the short and medium term. It’s perhaps a reminder that even as China has become a global economic, trade and investment powerhouse, there are always ups and downs along the way.
The world’s second largest economy grew 5% in 2024, with a series of stimulus measures contributing to growth of 5.4% in the final three months of the year. The Chinese stock market also posted gains in 2024, ending a three-year decline that began with the Covid-19 pandemic. Stock market growth had already slowed prior to the pandemic, albeit relative to eyecatching highs in the noughties – the Shanghai Stock Exchange Composite Index (SSE Composite) gained around 1,200% between 2003 and 2007.
Funds investing in Greater China and in the wider Asia-Pacific region suffered outflows in 2024, despite the market recovery. But demand for China will remain robust, even though, like all emerging markets, it comes with plenty of risks as well as rewards. So, if you’re thinking of investing in China or simply want a sense of how the land lies, here’s five pointers to consider.
Trade headwinds
There’s no escaping the political tensions that are rising once again as Donald Trump gets his feet back under the presidential desk. The 2018-19 trade war between the two countries affected some $450 billion in annual trade, according to the World Bank, and it looks set to escalate once more.
Trump has pledged to impose 10% duties on all U.S. imports and 60% on goods from China, and with exports a big factor in last year’s growth, it poses a genuine threat to the outlook for China. It has sought to reduce its dependence on exports, but the effect of new tariffs on global supply chains and trade flows will represent a stiff challenge for China’s economy and stock market.
Long-term opportunities
The outlook for China’s economy is more muted than it was a few years ago, but the potential for strong growth remains. Some of the difficulties China has experienced in recent years, such as the bursting property bubble and a painful industrial transition, had been anticipated. It has now implemented measures aimed at strengthening its economic foundations, such as boosting domestic consumption and stabilising the property and stock markets.
Some strong fundamentals remain in place too. For instance, China is still the world’s second biggest economy, is home to about a third of global manufacturing capacity, accounts for 18% of global GDP and a fifth of global market capitalisation. China is also investing heavily in the industries of the future, leading the way in areas such as electric vehicles, batteries and solar and wind power.
A demographic problem
While India will have a strong supply of people entering the workforce over the coming years, China has an ageing population with people leaving the workforce at a faster rate than entering it.
The Economist forecasts that by 2035, those aged 60 or over account for a third of China’s total population. With knock-on effects including shrinking consumer markets, an overcapacity issue – where supply outweighs demand – and an underfunded pension system, the country has significant structural problems to deal with.
An evolving investment culture
For many years the investment culture in many Asian and emerging markets wasn’t one that encouraged companies to distribute profits to investors. But that has begun to change in recent times and Chinese firms are encouraged by the China Securities Regulatory Commission (CSRC) to increase their focus on shareholder returns.
Investors in Chinese companies are now more likely to be rewarded with dividends, adding a dimension to the investment case that was previously missing. More recently, investment returns have been bolstered by an increase in companies buying back shares in order to avoid falling foul of the regulator.
Dip, don’t dive
For all the obvious and compelling growth potential, there are plenty of challenges too. The overheated housing market, geopolitical and trade challenges, an ageing population and ongoing concerns over transparency and corporate governance are just some of the reasons to remain cautious.
But while China will remain a volatile market, its growth story is hard to ignore. With this in mind, it should only form a small part of any diversified long-term investment portfolio. There’s a wide range of funds and investment trusts specialising in China these days, with the Fidelity China Special Situations the UK’s only £1bn investment trust in the sector. Recent strong performers include the FSSA Greater China Growth, the iShares China Large Cap ETF and the Jupiter China fund.
For most investors, broader funds that offer exposure to China as part of a regional or emerging markets mandate will be a better bet. The M&G Asian, Schroder Asian Alpha Plus and Baillie Gifford Pacific have performed strongly of late while prominent emerging markets funds and trusts include those run by Templeton, JP Morgan and Invesco.
Remember – diversification is the key to successful, long-term investing, so make sure you invest across a range of funds, regions and asset classes so you can maximise your gains while minimising your losses.
Photo by Kameleon007 on Canva
