The year of the snake: will China strike back?

As China ushers in the year of the snake, there are a range of potential parallels for the country’s stock market. It could slide downwards, as the pressure of US tariffs and a difficult property market weigh on the economy. Or it could be a period of renewal and regeneration. Like a snake shedding its skin, China may be able to slip out from the difficult period it has endured over the past three years.

However, the strongest analogy is that, like a snake, China’s fortunes are slippery and elusive. Stimulus from the government could see the economy revive, the property sector’s woes may dissipate, and consumer spending could bounce back. In this case, this would look like an ideal moment to buy into China, while valuations are still cheap. On the other hand, the deflationary pattern of the past few years could continue, and the country’s stock market could get cheaper still.

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Signs of life for the Chinese economy

The Government enacted a stimulus package in September. This was a package of measures designed to shore up the property sector and boost the stock market. It appears to be having the desired effect. The Chinese economy saw a late surge in 2024, with GDP growth tipping over the government’s target of 5%*. The Shanghai Composite jumped almost 30% in the immediate aftermath of the stimulus package and has largely held its levels since then**.

In spite of its recent bounce, most fund managers agree that the Chinese market is cheap and – as the recent performance has shown – the market can move a long way very quickly. Prior to its recent rally, it has had three years of sliding markets, which has left valuations looking appealing. The question is whether it is cheap for a reason and could still fall, or whether it is on the cusp of a more permanent recovery.

In an economy as large and diverse as China, there will always be opportunities. Its vast size means that companies have large addressable markets and there are always plenty of growth stories. At 5%, China is still delivering higher growth than developed economies*. The recent launch of AI model DeepSeek at a fraction of the cost of its US equivalents shows the country’s technological prowess.

But there are still risks

The geopolitical situation remains uncomfortable. The country is a source of understandable suspicion for Western governments and continues to have some unpalatable political allegiances. Some managers won’t touch it as a result. Jason Pidcock, manager of the Jupiter Asian Income fund, for example, continues to have no Chinese exposure in his fund.

There is still a significant question over the property market. Consumer wealth is concentrated largely in real estate, which means the problems in the property sector have wider implications for consumer confidence and spending. Research from Goldman Sachs suggests that without further intervention, property prices could still fall another 20% to 25%***. However, it adds that policymakers have done a good job in stabilising the market for the time being.

Then there is the Donald Trump conundrum. The new US administration is no friend to China. Trump has threatened to impose tariffs of up to 60% on China, though he seems to have moderated it more recently to 10%. Any tariffs on Chinese-made goods would potentially harm existing supply chains and exporters.

China is well-used to tariffs, and the government has been happy to impose a few of its own. For example, China imposed anti-dumping tariffs on European Union brandy imports in October, impacting drinks companies such as Pernod Ricard. Nevertheless, further tariffs from the US would hurt. The Chinese government could respond with another stimulus package, but there will be uncertainty in the meantime, which is unhelpful for stock markets.

The verdict?

Well, it’s slippery and elusive. The stock market is cheap and has the potential to bounce a long way if there is even a modicum of good news. But there are still problems for China and tariffs are a significant unknown. As always, we would suggest putting yourself in the hands of a capable active fund manager with a good understanding of the country.

If you do fancy a dabble in China, there are three main ways to do it. You can look at a dedicated China fund such as the FSSA All China or Allianz China A-Shares funds. The ‘A’ shares market is the local market, listed in Shanghai. The FSSA All China fund will also invest in ‘H’ shares listed in Hong Kong. This gives each fund a slightly different flavour. These are both run by capable managers, well-versed in finding pockets of growth, and avoiding the pitfalls in the Chinese market. Nevertheless, they are high octane options.

A less binary option would be an Asia ex Japan fund such as the Baillie Gifford Pacific fund. It has 33.8% weighting in China, but this is balanced with holdings in India, Taiwan, Vietnam and others^. Also, it has a strong growth focus, so expect it to zero in on the pockets of growth in the Chinese economy. It holds technology companies such as TenCent or Meituan, a Chinese online shopping platform^.

Alternatively, global emerging market funds will often have a decent slug in China. For example, the M&G Global Emerging Markets fund has a 29.5% allocation to China, but also has exposure to Brazil, South Korea and South Africa^. Its holdings include jd.com, and Ping AN Insurance Group of China^.

China has had a difficult run, but history suggests this won’t last indefinitely. It is the world’s second largest economy, with a range of opportunities. It has its problems, but investors should keep an eye on it.

*Source: Financial Times, 17 January 2025
**Source: MarketWatch, at 27 January 2025
***Source: Goldman Sachs, 11 November 2024
^Source: fund factsheet, 31 December 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.