China's Market

Should your 2020 investment plan involve China’s market?

China. It’s a country that’s been making headlines for its rapidly growing economy. Over the years, China’s market has gained a substantial amount of strength and has dramatically risen in importance.

In recent times, however, the nation has become known for several developments. For one, trade tensions with the US led to some material slowdown in economic growth in 2019.

The question remains; will 2020 be a good year for China and should investors be open to opportunities from the Far Eastern giant? Here are a few things that you should probably take note of before you make any rash decisions.

China is expected to stabilise in 2020

Most estimations point to China’s economy bouncing back this year. The central bank has started introducing initiatives to help improve access to credit. Other efforts include tax and spending policies issued by the government. If tensions with the US simmer down any time soon (possibly with some form of trade deal), we are probably going to see a modest reacceleration in economic growth for China as the year presses on.

Policymakers are focusing on more stimulus

For those who didn’t know, 2020 actually represents the final year in China’s five-year plan (the 13th of its kind). Within this plan, key goals include doubling the country’s GDP between 2010 and 2020 (which can only be achieved if the nation delivers GDP growth in the region of 6% by next year). Essentially, this means that Chinese policymakers are making moves to allow this growth to happen. They are putting emphasis on the management of longer-term risks in the economy, while possible monetary policies in the form of reserve requirement ratio (RRR) cuts for banks and lower Loan Prime Rates (LPRs) (among other things) could contribute as additional easing factors.

China's market

The market might be more volatile than expected

Critics of China’s market have often considered it to be quite volatile, claiming that it’s dominated by individual investors (more specifically retail investors). As a result, the market is prone to sharp rallies and steep declines. However, this volatility is not the only factor that some investors and academics take into account when dealing with unfavourable long-term performance.

Aside from this, there are many publicly listed companies that are inefficient (especially state-owned enterprises), and corporate governance has shown some patchy management plays over the years. There’s even a possibility that the government could distort prices (as seen between 2014 – 2015, when a massive stock rally was encouraged).

The local stock market has its flaws

One of the most prominent factors related to the local stock market’s stunt in growth is this. Many of their most successful and fastest-growing companies aren’t trading in the mainland. Giants like e-commerce powerhouse Alibaba Group Holding Ltd. and internet giant Tencent Holdings Ltd hold a combined worth of more than $1 trillion following their massive growth in recent years. The problem is that Tencent is trading in Hong Kong while Alibaba made a debut in New York in 2014 right before opting for a secondary listing in Hong Kong.

Chinese authorities are trying to turn the tables by encouraging more local listings for tech startups. In 2019, they launched the Star market in Shanghai, which offers a few benefits including less burdensome demands on companies that are going public. Even if corporations increase efficiency and focus more on returns, the rapid economic expansion is no longer there to help underpin their growth.

There’s an exploration of tech markets such as the crypto market

Aside from e-commerce, crypto is another digital industry that investors in China are exploring. However, honing down on crypto does lead to issues. Factors revolving around crypto market prices can be hard to pinpoint particularly since data is sometimes not available and transparency can be a problem.

On top of this, the market cap for cryptocurrencies is significantly smaller when compared to the stock market. This leads to many variables impacting the market, and no sure-fire way to determine where it all might end up. Asian crypto investors are usually retail investors, which means that certain global events, like major holidays or outbreaks of viruses, can affect the direction of the market.

Look out for leading indicators like the Euro

News is often a lagging indicator for markets. China’s stock market, for instance, turned around the moment media-fuelled fear reached its peak last year. When bearish China stock market headlines were everywhere, few investors had the guts to buy any stocks from the country, but those who did reaped rewards.

The best approach would be to look at leading indicators. The Euro has a tendency to forecast big moves in other markets. A sudden breakdown or breakout in the Euro could lead to developments in other markets. For now, the Euro may have a positive correlation with emerging markets, but China could go against the tide. Consider paying attention to leading indicators and making careful, calculated decisions based on your findings.

All in all, China’s overall economic growth is seen by many to be on its way up and yet, plenty of concerns leave investors and industry leaders on edge. The usual investment vehicles such as shares and bonds may be giving way to more digital instruments. With regards to finance, there are a number of factors that point to opportunities in China, but these could possibly be risky endeavours. If you aren’t an expert on the topic, and if you don’t have a clear point of entry, it may not be worth the trouble. Consulting a financial expert could help you make an educated decision if you decide to enter China’s market in search of financial gain.

Hampton Wealth specialises in sourcing high quality, listed bonds and funds with a focus on providing returns in excess of normal off the shelf investment options.

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