Chinese Foreign Investors Suffer as Economic Realities Bite
The once sought-after Chinese market is now causing headaches for foreign investors as the country grapples with economic challenges and strained relations with Western governments.
On January 22, the CSI 300 index of Chinese stocks fell 1.6%, marking a nearly 25% decline from its level just a year ago. Similarly, Hong Kong’s Hang Seng Index dropped 2.3% on the same day and is now more than a third below its level at the beginning of 2023.
The decline has left many foreign investors feeling the pinch, with some turning to alternatives to mitigate their losses. Investment manager Jupiter Asset Management, as well as Putnam Investments and Vontobel, launched actively managed “ex-China” funds in 2023. BlackRock’s non-China emerging markets exchange-traded fund has also seen significant growth in assets under management, reaching $8.7 billion, up from $5.7 billion in July.
The shift away from Chinese markets has seen a surge in investment in other emerging stock markets, particularly in India, South Korea, and Taiwan, which together account for over 60% of emerging market stocks excluding China. Japan has also seen increased interest from investors, with foreign investment in Japanese equity funds reaching $20 billion, the most in a decade.
However, these alternatives are not without their drawbacks. Indian stocks are seen as expensive compared to other emerging markets, while Japanese stocks may not offer the rapid income growth some investors are seeking. Additionally, the smaller economies benefiting from the shift of supply chains away from China are more susceptible to the fluctuations of the U.S. dollar and interest rates.
The emergence of funds that exclude China from their investment portfolios is set to make it easier for investors looking to avoid the Chinese market. However, without a significant change in China’s economic situation or an improvement in relations with Western governments, the once enthusiastic investment in Chinese stocks may become a distant memory for many foreign investors.
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