Chinese companies have been showing excellent financial results lately and have good growth potential. However, such investments are associated with a number of risks. Manifestgrowth has decided to invest in 2 companies. One of them is completely private, the second is 50% owned by the state. Our selected companies have become part of a diversified portfolio of stocks.
While everyone falls, the Celestial Empire grows
The last year has been difficult for the economies of all states, including China. China’s GDP grew by 2.3%, while the normal average for this indicator is 6%. A similar picture was last observed in 1976. Other countries in 2020 also faced a decline in the economy:
- USA – by 3.5%;
- Japan – by 4.8%;
- Germany – 5%;
- France – by 8.3%.
Even in difficult economic conditions, Beijing is showing an increase in capital investment and industrial production. The Chinese authorities are helping the country to maintain positive dynamics by developing government programs to stimulate business and develop infrastructure. Yet, in the first quarter of 2021, the Chinese economy has grown by more than 18%. The active economic growth of the Celestial Empire is positively influenced by the increase in demand for state-produced goods and the strengthening of the real estate market.
Analysts in long-term forecasts predict stable growth of the Chinese economy until 2025. Until then, this figure is expected to be 5.7%, and then it will drop to 4.5%. With such a pace of development, the economy of the Celestial Empire can become the largest in the world. Despite the positive forecasts, many investors are in no hurry to invest in Chinese companies.
Risk Factors When Investing in Chinese Companies
Over the past few years, the growth of the Chinese economy has been supported by domestic consumption. However, during the pandemic, the activity of consumers in the Celestial Empire decreased. In a study published in The New York Times, this situation was explained by the fact that during the quarantine period, people in China took out a lot of loans to cover their daily expenses. Now they are forced to pay off debts and spend less on non-essential goods and services. It should be borne in mind that in China, citizens did not receive financial aid from the state during the pandemic, unlike the United States. In this regard, domestic consumption in the Celestial Empire will not grow at an accelerated pace in the near future.
The main risks of investing in Chinese companies include the trade struggle with the United States. Duties and various prohibitions for investors from America negatively affect the economy of the state.
Chinese companies face several challenges:
1. Pressure from the US government. Donald Trump, during his governance, was determined to exclude shares of Chinese companies from the United States stock market. This situation at that time had a detrimental effect on the financial performance of enterprises from the Celestial Empire, securities of which were traded on American stock markets. Joe Biden is less dramatic than the previous president. However, the current head of the United States has already presented a list of Chinese organizations in which American investors cannot invest.
2. Situation inside the country. The authorities are exerting significant pressure on the state of Chinese business. One of the striking examples is the confrontation between billionaire Jack Ma and the government and the suspension of the IPO of his financial company Ant Group. You can also mention the Anti-Monopoly investigation against Alibaba. As a result of the increased attention of the authorities to this marketplace, not only did the company’s shares fall, but the entire Chinese securities market suffered. At the moment, Alibaba quotes have recovered, and the site is operating normally. But investor reviews indicate their wary attitude towards large Chinese organizations since it is not known who will be the next to fall under the tight control of the authorities.
3. Possibility of bubbles appearing. The population of the Celestial Empire is actively responding to the growth of quotations on the stock market. The attention of a large number of non-professional investors to stocks of companies provokes the appearance of bubbles. So, since 2007, when one of them burst, the stock index of the Shanghai Stock Exchange has not yet recovered.
More than one country has suffered in the trade wars with the United States. For example, in the late 90s, Japan was prophesied to be the state with the largest economy in the world. But the confrontation with America led to the collapse of the Japanese market index (Nikkei 225).
What stocks did the participants of Manifestgrowth invest in?
Having weighed all the benefits and risks of investing in Chinese companies, Manifestgrowth decided to invest in some organizations from the Celestial Empire. The easiest and most reliable way to invest in Chinese businesses is to buy an ETF. Investment funds are interested in the shares of individual companies or entire industries. Famous ETFs focused on the Chinese stock market include iShares MSCI China ETF, Invesco China Technology, SPDR S&P China ETF, and others.
Since Manifestgrowth’s investment portfolio of stocks is already diversified, we did not direct investments to exchange-traded funds, but to the assets of individual companies:
• Sinopec Shanghai Petrochemical Company Limited – a half-state manufacturer of refined products, plastics, synthetic fibers;
• Baozun Inc. – a private company providing marketing and IT services for stores selling products from clothing and cosmetics to cars;
• Roblox – online gaming platform;
• Usana Health Sciences – manufacturer of nutritional supplements, skincare products;
• Spotify – music service.
Among the listed enterprises, 2 – Sinopec Shanghai Petrochemical Company Limited and Baozun Inc. – are based and operating in China. Both companies have good growth potential. We chose Chinese organizations that are traded on US exchanges to avoid currency conversion.
Financial results of companies
Manifestgrowth invested in Sinopec Shanghai Petrochemical Company securities when their value fluctuated around $23.8. After the start of the trading struggle with the United States, the value of the company’s shares dropped significantly and never returned to the previous level of $70. We expect the rate to partially recover and rise to $30. At the time of the purchase of Baozun shares, their value was $35. In the winter of 2021, the exchange rate exceeded $50, so we are counting on an increase in quotations.
If we take into account the non-Chinese companies whose shares are included in the investment portfolio of Manifestgrowth, Roblox and Usana Health Sciences have shown high returns recently. Spotify also posted good financial results, with shares up about 15% by early July. Some of the non-Chinese institutions we have invested in have dropped by more than 10%. These assets include Delta Air Lines, an agro-industrial company, Bunge, and the Manchester United soccer club.
Our diversified investment portfolio of Chinese companies is performing well this year. Despite the risk factors and the unstable situation on the market, the enterprises of the Celestial Empire remain promising assets.