YINN - Deeper Dive: Investing in China - The good the bad and the ugly

2023-06-21 12:33:39 ET

Investing in China can be an arduous process for many investors. The world's second-largest economy offers a tremendous amount of upside and opportunity, while also remaining a challenge, as the nation's deteriorating political relations with the United States make it difficult for investors to allocate capital given the nation’s long-term direction.

The Good

At face value, China offers investors a plethora of opportunities to invest in from segments that include e-commerce, tech and gaming, electric vehicles and more. A handful of prominent Chinese based stocks include the likes of Alibaba ( NYSE: BABA ), Baidu ( NASDAQ: BIDU ), Tencent Holdings ( OTCPK:TCEHY ), JD.com ( JD ), PDD Holdings ( PDD ), Li Auto ( LI ), and XPeng ( XPEV ). Moreover, see what others have noted about some of the stocks that make up the geographic region:

• Morgan Stanley upgraded Baidu to Overweight , making the Chinese internet search giant its second pick after Alibaba.
• JR Research, a Seeking Alpha analyst said: “ JD.com: Seriously Undervalued And Unloved ”
• Regarding BABA, Dair Sansyzbayev noted : “The company is well-positioned for growth in e-commerce and cloud computing, with a vast ecosystem, which is a solid competitive advantage.”
• “We believe China's internet industry presents one of the most compelling long-term growth opportunities for investors today,” KraneShares stated. For reference, KraneShares is the parent issuer of the KraneShares CSI China Internet ETF ( NYSEARCA: KWEB ).

The Bad

The sticky part for investors becomes how to predict the future when it comes to political affairs in Beijing, as many policy stances are abruptly instituted or withdrawn with limited notice that can have heavy consequences linked to underlying positions.

Beijing in the past has penalized, halted and delisted stocks that did not follow strict policy procedures put forward by the local government. It was not that long ago that China instituted a crackdown on big tech and big data that crushed companies like DiDi Global (DIDI).

The Ugly

The one point that can rattle the investor community are any geopolitical tensions. Relations between the United States and China may have recently made some improved steps as Secretary of State Anthony Blinken visited Beijing which included a meeting with Chinese President Xi Jinping. In response to the meeting, President Joe Biden said : “He (Blinken) did a hell of a job," and went on to say "we're on the right trail here."

While tensions might have simmered, they are still sitting on the backdrop of the chip war between the two nations. Earlier in the year, Japan and the Netherlands set out to join the United States in a semiconductor chip battle against China, while last summer saw the passing of the CHIPS and Science Act , which allowed the federal government to pour billions of dollars into the semiconductor sector to "lead the world in future industries and protect national security."

In a tit-for-tat response, the Chinese government found Micron Technology's ( MU ) products to have "relatively serious" potential network securities issues and warned operators of critical information infrastructure to stop purchasing the goods.

Conclusion

Year-to-date price action on the Chinese stocks discussed: BABA -4.7% , BIDU +21% , TCEHY -1.7% , JD -35.9% , PDD -12.7% , LI +61.8% , and XPEV +6.8% .

For a more diversified view on Chinese stocks, see related China-based exchange traded funds: ( FXI ), ( KWEB ), ( CQQQ ), ( MCHI ), ( ASHR ), ( YINN ), ( TDF ), ( CHIQ ), ( GXC ), ( EWH ), ( KBA ), ( YANG ), ( CXSE ), ( CAF ), ( CWEB ), ( PGJ ), ( KURE ), ( CHIX ), ( CYB ).

More on China:

• China cuts lending benchmarks to prop up slowing economy
• Micron slips after it says half of China revenue at risk
• China is holding back on stimulus - watch these stocks

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