Is it still safe to invest in China, or in Chinese companies like Alibaba Group (NYSE: BABA)? Let’s take a look at the risks and rewards.
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China is one of the fastest-growing countries in the world, and as such, has proven to be a lucrative market to invest in for many years now. Chinese e-commerce companies like Alibaba Group (NYSE: BABA), JD.com Inc (NASDAQ: JD), Baidu Inc (NASDAQ: BIDU) and Tencent Holdings (OTCMKTS: TCEHY) have exploded in value over just the past 5 years. And with China reportedly leading the world in post-COVID-19 economic recovery, things look set to continue on this path for investors looking to China.
However, China has also increasingly provoked the ire of other countries in recent years, particularly the United States, but also Australia. We won’t go into the political sphere too much here, but I think it’s fairly safe to say that China’s handling of a number of issues, not least of which involving Hong Kong, have been controversial. As have the moves from China to impose export restrictions on a number of Australian industries, such as wine and barley.
All of this matters because we could be seeing a de-coupling of trading norms between China and both Australia and the US. The rhetoric stemming out of the US in 2020, in particular, has been alarming for anyone with investments in China or Chinese companies. It was only last year that the Trump administration was threatening to force Chinese companies like Alibaba and Tencent to de-list from US stock exchanges. And then there’s also the regulatory issues stemming from the oblique American Deposit Receipts (ADR) structures that most Chinese companies list through.
So is China still a safe place to invest?
Is China worth a look in 2020?
I think there are still sufficient reasons to consider investing in top Chinese companies today. This is still a massive growth market, and also one that is relatively uncorrelated to other share markets like the US and Australia. This can be great from a diversification standpoint. However, I do also acknowledge that some of the concerns listed above remain pertinent. We have a highly anticipated US presidential election coming up. If President Trump is reelected, we could see a resumption in the trade wars that dominated Sino-US trade relations prior to 2020. This could well lead to further deterioration between the two countries, which could end up at a point where Chinese shares are indeed ejected from the US capital markets.
Considering all of these factors, I still think investing in China or Chinese companies is a good idea. But I personally would only recommend a small allocation in a portfolio to Chinese companies, to account for the significant risks remaining. I would also stick to the ‘big names’ like Tencent and Alibaba, or otherwise with exchange-traded funds (ETFs) like the BetaShares Asia Technology Tigers ETF (ASX: ASIA) or the VanEck Vectors China New Economy ETF (ASX: CNEW).
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Sebastian Bowen owns shares of Baidu. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alibaba Group Holding Ltd. The Motley Fool Australia owns shares of and has recommended BetaShares Asia Technology Tigers ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.