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HomeMarketBuy Chinese Stocks? There Are Reasons for Caution.

Buy Chinese Stocks? There Are Reasons for Caution.

The suspected Chinese spy balloon as it flew over Montana on Feb. 1.

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Chase Doak/EyePress News/Shutterstock

While Chinese stocks are up by nearly half over the past three months, some investors aren’t rushing to buy.

The tit for tat over the Chinese spy balloon that flew over the U.S. and protests by the elderly in China over cuts to health insurance highlight the reasons for the hesitation. Concern about geopolitics and structural challenges for the Chinese economy is holding people back, although things are going better than they have been on some fronts.

The iShares MSCI China exchange-traded fund (ticker: MCHI) has risen 45% since late October, after Chinese authorities signaled a relaxation in policies that had strangled the economy, including a zero-tolerance approach to Covid and a crackdown on its property and technology sector. Also positive is that Xi Jinping and President Joe Biden have tried to create guardrails for what has been a quickly deteriorating relationship.

China’s economy is poised for a near-term recovery and the U.S. and China are trying to re-establish channels for communication, but some money managers are wary of trouble. On the economic front, they see challenges because high unemployment and three years of Covd-19 lockdowns have left people scared to buy. The population is aging rapidly and a mountain of debt limits policy makers’ ability to create big-bang stimulus to revive its economy.

News that elderly people have taken to the streets in Wuhan to protest cuts to their medical benefits underscore the stress on China’s social safety net as the population begins to decline.

“It speaks to the pressure the system is already under from a fiscal perspective and the strain is just going to grow with the aging of the population,” said Michael Hirson, an analyst at 22V Research. Government spending is needed to bring a rebound in consumption in China, but policy makers are holding back because of concern about long-term issues, he said.

The household savings rate rose to 33% late last year, up from 30% in 2019. That buildup of savings has cheered bulls who expect Chinese consumers to tap it for so-called revenge spending as the economy opens up. But Hirson thinks the recovery could be more gradual than some expect as households hang on to a larger share of that savings until they feel the economy is on more solid footing.

Tensions between the U.S. and China appears to be making some investors interested in riding the Chinese recovery hesitate to buy Chinese stocks directly, Hirson said.

Sammy Simnegar, manager of the Fidelity International Capital Appreciation fund (FIVFX), fits that bill. Reasons for caution he cited include slowing economic growth in China, increased government involvement in the private sector, the fact that corporate government on the mainland isn’t improving, and the West’s effort to shut China out of the race to develop the newest technology

“If you do want exposure to China, you want to own consumption, like luxury companies with indirect exposure and good corporate governance,” said Simnegar, whose holdings include LVMH (MC. France) and
Cie. Financière Richemont
(CFF. Switzerland).

On the geopolitical front, the U.S.’s discovery and downing of a suspected Chinese spy balloon adds fuel to calls in Washington, D.C. for tougher actions toward Beijing. China, meanwhile, has placed symbolic sanctions on U.S. defense companies like
Lockheed Martin
(LM) and
Raytheon Technologies
(RTX), citing their sales to Taiwan.

Those companies are largely banned from selling to China in any case, but the move underscore the fact that the relationship is shaky despite discussions for a possible meeting in Munich this weekend between Secretary of State Antony Blinken and China’s Foreign Minister Wang Yi.

Geopolitics is the biggest risk, according to Rajiv Jain, chief investment officer at
GQG Partners.
He manages the GQG Partners Emerging Markets fund (GQGIX), which has half the exposure to China as its peers, at 13%.

“If Huawei and China Mobile can be sanctioned, why are
Alibaba Group
and Tencent not fair game?” Jain said of the U.S. decision to blacklist the two companies during the Trump administration. “If you take a three-year view, there’s a higher probability of some sort of restrictions or sanctions. If you want to curtail China’s artificial intelligence capabilities, you have to target these companies.”

Geopolitical analysts say curbs on funds’ buying shares in China’s big internet companies probably won’t be part of a likely executive order related to investment restrictions. Any limits are likely to be focused more narrowly and would probably first address private equity and venture capital, analysts say.

But pressure and increased scrutiny from the U.S. is likely to continue, so investors in China shouldn’t get too comfortable.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

Write to Reshma Kapadia at reshma.kapadia@barrons.com

Credit: marketwatch.com

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