China’s rapid recovery from COVID, along with its long-term growth prospects and the stability of dynamic companies, has led its companies to perform strongly since the start of the year: the Shanghai index is up by almost 12% and the CSI by 22%. But before you jump into this market yourself, be sure to assess why Chinese stocks are doing well – and whether their run will continue.
Why avoid China
Despite their recent surge, Chinese stocks have performed poorly in the long term. The Shanghai index has actually declined over the past five years, and only slightly increased over the past decade. This series of poor performance can give you a break from investing; after all, it’s not as if China is a newly discovered secret. It has been the world’s fastest growing major economy for years and has well-known companies like Alibaba (NYSE: BABA) and JD.com (NASDAQ: JD). Yet that was not enough to generate strong returns.
Chinese accounting standards are still lower than those of many other countries. Moreover, there is no doubt that relations with the United States have deteriorated under President Trump, and the actions of the current lame White House executive could lead to short-term volatility. And even once President-elect Biden takes office, there is no indication that the incoming administration will take a softer tone towards China.
China has worked hard to overcome the dichotomy of exploiting a capitalist economy under a communist government. The state leaves many companies alone, provided they do not engage in politics. But Ant Financial’s recently canceled IPO is a reminder that the government can do whatever it wants. Apparently the IPO, which was supposed to be the largest in the world, was called off due to “major issues” with the filing, but company founder Jack Ma’s criticism of banking regulators Chinese also seems to have played a role.