In recent months, the world’s attention has been captured by China’s latest government crackdown. First, it was the Alibaba (NYSE: BABA) scandal, when the Chinese government filed an anti-monopoly probe against the e-commerce giant. After that came countless other probes and investigations into Chinese stocks that were listed on overseas exchanges.
What is going on with Chinese stocks?
Last week, the news was centered around a new drama involving speculation that China’s real estate industry is slowing when the prospect of a potential debt default arose for Chinese real estate giant Evergrande. The news sent shockwaves across the globe to U.S. markets as investors feared a credit crisis could result in economic distress for China. Strategists also warned that the Chinese government might bail out onshore investors but officials might leave offshore investors in the lurch, which would impact global markets. The news had a massive impact on U.S. tech giants, including Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN).
While many investors bought the dip in these U.S. mega stocks, others have been put off buying Chinese stocks.
Another concern is the political climate in China. Beijing has recently been emphasizing an old political slogan, referred to as “common prosperity”, in a bid to put some socialism back into its economy. After decades where private business was encouraged in China, General Secretary of the Chinese Communist Party, Jinping Xi, is being said to be leading a campaign against private entrepreneurs and companies.
This campaign has resulted in a fall in the valuations of Chinese tech companies. Didi (NYSE: DIDI), the ride-hailing app that made its stock market debut back in June, has fallen almost 50% since its IPO. This company had huge potential and the dramatic drop has spooked investors from buying similar Chinese technology stocks.
Why do U.S. investors care about China?
All of the above is very important for the global economy as China is a massive country with huge potential to disrupt markets if it were to fall into a credit crisis. Similarly, huge Chinese companies like U.S.-listed Alibaba, JD.com (NASDAQ: JD), and Tencent were very popular stocks on Wall Street and their share prices falling has put off new potential investors.
In addition, there are over 230 Chinese companies listed in the U.S. which are estimated to be worth over $2 trillion meaning there is massive interest when there are big developments in the country.
Not only are investors in individual Chinese stocks concerned, but other retail traders have put cash into China funds, Asia funds, and other tech funds which have been caught up in the downward spiral.
Is investing in Chinese stocks a good idea?
Despite all the political and governance issues plaguing these stocks, there are still some benefits of investing in Chinese stocks that might make it worth the risk. They include;
- The potential to diversify your portfolio outside of the U.S.
- The size and dominance of China’s economy, with many expecting it to become the biggest in the world.
- The high standard of technology advancements that are coming from the region.
- The rising middle class who are spending money on sophisticated technology.
Tesla has been a big benefactor of the growing demand for innovative technology in China, as citizens opt to go green by buying electric vehicles. The market is considered to be one of Tesla’s most important to dominate in and again shows the importance of the country for global financial interest.
Should I invest in Chinese stocks?
Investors wanting to invest in China will require a big leap of faith in the country’s future political and governance stance. If companies can survive the harsh government climate it will be a good test to see how flexible they can be.
To avoid as much risk as possible, it might be best to wait to see how these issues develop as it looks like China is just at the start of making huge economic and political decisions that are going to have a massive impact on Chinese stocks.
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Financial Writer at MyWallSt
Nicole's favorite stock is Etsy because she loves its original and handmade items. She believes people are going to stop buying mass-produced items and start purchasing ‘one of a kind’ fashions and furnishings. In a world of sameness, Etsy has the advantage.