During the China Café on 2 March in Utrecht, a highly topical and much-debated theme took center stage: investing in China. The evening was opened with warm wishes to the audience for the start of the new Year of the Fire Horse, after which the discussion shifted to the key question: does China currently offer growth opportunities for investors, or do the risks outweigh the potential rewards?
Lianne Baaij, sinologist and board member of Netherlands-China Association (VNC), interviewed market analyst Jean-Paul Van Oudheusden, economist (graduated from Erasmus University in 1996) and founder of Markets are Everywhere. His fascination with markets beyond the traditional focus on Western giants formed the foundation of his company. According to him, many banks concentrated their attention on well-known names like Shell for years, while China remained underrepresented. He wanted to change that: after all, markets are everywhere.
Structural Slowdown of the Chinese Economy
The conversation began with the slowdown of China’s economic growth. Where the country recorded growth rates of more than 10% in previous decades, growth now hovers around 5%. According to Van Oudheusden, 5% remains respectable from a global perspective, but the nature of the slowdown is largely structural. A significant portion of the previous growth stemmed from the real estate sector. For years, that sector acted as the engine of the economy, but he considers it unlikely to return to its former levels of expansion.
The question then arises as to which sectors can take over the role of growth engine. China is investing heavily in technology, green energy and domestic consumption. However, the scale on which real estate contributed to the growth is difficult to match. In addition, further economic expansion requires an increase in export of high-end products, putting China in direct competition with other economies.
Is China Indispensable for Investors?
The central question was whether China is an indispensable part of an investment portfolio. According to Van Oudheusden, “indispensable” is a strong word. In recent years, investors have achieved solid returns without Chinese stocks. At the same time, as the world’s second-largest economy, China is too important to ignore. Diversification is crucial in investing, and China offers a different risk-reward profile than Western markets.
Geopolitics plays a major role here. Tensions between China and the United States influence the investment climate. Trade restrictions, tariffs and political rhetoric create uncertainty. Nevertheless, Van Oudheusden points out that both countries are still economically interdependent. For investors, it is more important to follow trade flows and economic data than to be guided by newspaper headlines.
An example of geopolitical sensitivity is the position of Taiwan and chip manufacturer TSMC. Semiconductors are crucial to the global economy. Through TSMC’s investments in the United States, the risk is somewhat spread out, which could contribute to stability – an important condition for investing in China.
Main risks
Van Oudheusden identified two specific risks for foreign investors:
- Government intervention – The Chinese government can intervene unexpectedly in sectors, creating uncertainty. A well-known example is the cancellation of Ant Group’s IPO and the subsequent pressure on Alibaba. For investors, uncertainty is often more problematic than bad news; Unpredictability makes valuation difficult.
- Overcapacity – This is present in various sectors, such as the automotive industry. Although Chinese companies are gaining global market share – BYD being a clear example – sales success does not always translate into attractive returns for shareholders. Competition is fierce, and profit margins are under pressure.
Transparency is an additional concern. Reporting standards differ from Western standards, making it harder to fully assess the corporate performance. Van Oudheusden therefore advises focusing primarily on larger companies with international listings and broader analyst coverage.
Opportunities in Technology and Energy
Despite the risks, there are clear opportunities. Chinese stocks are often valued lower than Western stocks, partly due to higher political risk. This can create opportunities. Sectors that perform well globally, such as mining, financial services and technology, are also showing strong results in China.
Technology is particularly attractive. Companies like Tencent and Alibaba benefit from developments in cloud computing and artificial intelligence (AI). According to Van Oudheusden, AI is not a hype but a structural development that makes production processes more efficient. Combined with China’s strong manufacturing capacity and innovative capabilities, this could yield long-term benefits.
Green energy also offers potential. China has a strong position in the production of solar panels and batteries. Here too, geopolitical tensions play a role here, making cooperation with Europe less smooth than would seem economically logical.
How to Invest?
When it comes to practical investment choices, Van Oudheusden recommends caution. For international investors, shares listed in Hong Kong (H-shares) are often more accessible and transparent than domestic A-shares. He finds American ADRs less attractive given the current geopolitical tensions.
For the average Dutch investor, an allocation of approximately 5% to 10% of the portfolio in Chinese equities could be appropriate. A higher allocation is possible, but carries considerably more risk. Broadly diversified ETFs are suitable for those who are short on time, while individual stocks require intensive monitoring.
Conclusion
Investing in China offers both opportunities and risks. Economic growth has slowed structurally, but remains substantial. Technology and energy are promising sectors, while government intervention and overcapacity remain major concerns. China is not necessarily indispensable in a portfolio, but it is certainly not a market to ignore. Above all, investors must diversify, deepen their knowledge of the market, and not be guided solely by geopolitical headlines.
About the China Café
Founded in 2007, the China Café is a platform where knowledge, dialogue and networking converge. It offers a space for anyone who wants to understand China better – not through quick headlines, but through conversation and in-depth exploration. The China Café is a key event of the Netherlands-China Association, with the slogan Bringing China closer, since 1977.
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