Chinese Equities

US Investors Continue To Allocate More Funds Towards Chinese Equities

Chinese Equities
US investors have continued to rotate funds over to Chinese equity funds amidst slowing US economic growth and the tension of US-China trade talks. While net flows to Chinese funds were mostly negative over the course of 2016, meaning investors overall pulled capital out of China, net flows have consistently been rising since 2017, reaching $1.87 billion in Q1 of 2019.

Perhaps the main contributing factor in this trend has been the ongoing trade war between the United States and China. While China has been one the fastest growing economies in recent years, growth rates have been predicted to slow, and the trade war has caused investors to worry even more. However, growing optimism over a trade deal and better than expected Chinese growth rates have renewed US investors’ faith in Chinese funds. Meanwhile, China is experienced a sort of “re-engineering” of its credit sector, which simply caused some growing pains.

The Chinese government has put in place policies to reduce the size of leverage in the economy, reducing risk. While growth rates will almost certainly slow, this reduces the risk associated with investing in the Chinese economy. Even with slowing growth rates, the Chinese economy grew by 6.4% last year, which is one of the highest in the global economy, and beat expectations.

Another major factor that has contributed towards optimism over China is the US monetary policy. As the US has tightened up on its monetary policy, it has allowed the Chinese government to feel less pressure over maintaining the exchange rate of its currency. The exchange rate, especially in the case of China which is a export-oriented economy, is an essential component in determining a country’s ability to export its goods. Since the Chinese exchange rate is relatively low, Chinese goods are relatively cheap in the global market, which benefits its companies which sell to the US and other markets.

While there is indeed much optimism over the Chinese economy, there is the looming issue of debt. Adding to the debt, the Chinese government is pursuing economic stimulus policies as well. However, Chinese stocks are still relatively cheap, with an average price to earnings ratio sitting around 11.5 to 12.

A possible incentive for further capital flows into Chinese funds is the push for increased transparency of Chinese companies. American investors will want to see more information about the companies they are investing in, so more transparency would make Chinese stocks appear more attractive.

Overall, the current consensus on the trade war is that a deal will be reached, which could provide a boost for Chinese stocks in the near future. If China’s growth rate continues to exceed expectations, Chinese funds will likely see further capital inflows. While debt is always a concern, Chinese stocks appear to be relatively cheap and therefore attractive to US investors. There do not appear to be signs of slowing when it comes to the flow of funds into Chinese equities.

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