Contemplating Chinese Stocks Amidst Tariffs and Trump's Presidency: Should You Invest?
ntv.de: Considering the risky landscape of investing in Chinese stocks, it's crucial to understand the potential threats such as trade wars, economic struggles within China, and political tensions with countries like Taiwan. In an interview, Professor of Financial Management Holger Graf explains these concerns.
ntv.de: Buying Chinese stocks seems like a gamble, especially considering the ongoing trade war, the possibility of a conflict in Taiwan, and China's internal economic problems, evident in the real estate crisis. However, could this uncertainty present an opportunity for potential investments in Chinese stocks?
Holger Graf: If a full-blown conflict were to break out between China and Taiwan, all German companies would likely suffer, regardless of whether the stock of a Chinese electric vehicle manufacturer like BYD plummets by 90% or Mercedes by 70%. The current real estate crisis in China poses another risk. China has tried to alleviate it with certain measures but has not yet resorted to a massive bazooka approach.
But it's not just that. Brussels is contemplating imposing tariffs on Chinese electric cars from July. It seems like China is retaliating through investigations into price dumping in brandy - a potential response to the previously discussed tariffs on electric cars. French companies are significant exporters of brandy to China, making it a vital market for them. Worldwide, almost a third of all spirits are consumed in China. There are also rumors of investigations into pork, which would primarily affect Spain. The situation is volatile.
Likely, things won't improve.
It might not. But it is essential to abandon the notion that the economic situation always reflects stock prices one-to-one. For example, consider the year 2020 at the beginning of the Covid-pandemic. At that time, there were predictions of disastrous economic developments. However, broad stock markets experienced an unexpected rally from the spring onwards. Consequently, it is plausible that China's economy may be struggling, but the stock market might have already factored this in and is subsequently recovering. Keeping in mind the stock market wisdom "Political markets have short legs," short- and medium-term political economic developments should not be overestimated.
As for the USA, it's unlikely that the presidency of either Donald Trump or Joe Biden would significantly impact the situation. Republicans and Democrats share similar views on China, differing primarily in the taxation of various products.
Despite the risks, the possible growth potential in China is often cited as a reason to invest. With a population of about 1.4 billion people, China is the second most populous country in the world. The market capitalization of all stock market-listed companies in China is still significantly lower than that of the S&P 500. Is there catch-up potential?
Many Chinese companies appear relatively inexpensive when measured by price-earnings ratios, as certain political risk has already been factored in. Moreover, China is the second-largest consumer market in the world. The current middle class consists of 400 million people, and the government aims to expand this to 800 million within ten years. If this goal is achieved, it will inevitably lead to increased private consumption, which would significantly boost stock prices for many companies.
China is undoubtedly a growing sales market, regardless of the outcome of the trade conflict. For both Chinese and foreign companies. Every second product bought online worldwide is currently bought in China. While consumption growth has been declining for some time, it could pick up again. For comparison: in 2023, 30% of global luxury goods and 27% of skincare products were bought in China. Investors should consider long-term horizons, aiming for a time frame of ten, twenty, or more years. In this time, a lot can happen. Whether engagement in China is desirable or not is ultimately up to each individual. There are valid arguments both for and against it.
Anyone looking to invest in Chinese stocks should be aware that there are different types of Chinese stocks. Here are the essential types and their differences: A-shares/H-shares, ADRs, and VIEs. A-shares and H-shares are real shares of real companies, but they differ: A-shares are traded in Shenzhen or Shanghai, on the Chinese mainland's two exchanges. Non-mainland Chinese were previously unable to buy A-shares, but this has changed. Today, both institutional and private investors can buy them, but purchasing A-shares as a private investor is challenging. Before this became possible, Chinese companies needed another way to attract foreign capital: H-shares. These are traded contrastingly in Hong Kong. This results in some companies having an A-share in Shanghai/Shenzhen and an H-share in Hong Kong. Economically, both shares are essentially the same, but there can sometimes be extreme price disparities between them. However, these differences mean that arbitrage is impossible.
How can I determine whether I have an H-share or another security of the company in front of me?
Here's a paraphrased version of the given text:
Consider BYD as an example. On German stock markets, you can purchase shares of this company using H-shares, which can be recognized by their ISIN (International Securities Identification Number). An ISIN for H-shares usually starts with 'CNE'. When you encounter a 'CNE-ISIN', it's typically a real share that allows you to own shares in the company.
If you're looking to buy BYD stock on a German exchange, you have two options: ADR or H-share. ADR stands for American Depositary Receipts. These come into play when a stock isn't traded on U.S. exchanges. With ADRs, you're essentially buying a certificate that represents the asset held elsewhere, denominated in USD, and can be traded on U.S. stock markets. Unfortunately, there are no ADRs for Chinese stocks. For instance, Nestlé has an ADR that's traded in the U.S. But for Chinese stocks, a European investor might wonder why buy a U.S. certificate instead of the actual stock in Hong Kong. One potential argument for ADRs is that they often trade more freely, with lower bid-ask spreads.
There's another type of stock potential China investors should be aware of: Variable Interest Entity Structure, or VIE for short. These are shell companies based in the Cayman Islands that collect money through an IPO in Hong Kong and make financial contracts with companies like Tencent and Alibaba. Both of these major Chinese corporations aren't listed on stock exchanges themselves. Instead, you'll only find Cayman Island shell companies and ADRs associated with them. VIEs carry a risk that should be known because they're not compliant with Chinese law but are tolerated. There's a theoretical risk that the Chinese regulator or Communist Party could declare VIEs worthless at any time.
From a research perspective, investing in individual stocks may not make much sense. A smarter approach, without providing any investment advice, seems to be investing in passive ETFs (exchange-traded index funds). In these funds, you'll find numerous stocks in the MSCI Emerging Markets Index, with China accounting for approximately 27%. This index is dominated by H-shares and VIEs from Hong Kong. A-shares have a relatively small portion, but you can still access them via other index ETFs.
This post does not constitute a recommendation to buy or sell individual stocks or other financial products. No liability is assumed for the accuracy of the data.
Read also:
- The ongoing turmoil in China's financial markets, such as the decline in share prices of companies like China Evergrande, is a direct consequence of the country's internal economic struggles and its disputes with international financial markets, particularly the United States.
- Despite the challenges and uncertain future of Chinese stocks due to factors like the financial crisis in Evergrande and the tensions with financial markets in the US, some financial investors are viewing this situation as an opportunity to invest in undervalued Chinese stocks, hoping for potential future growth.
