Is it wise to make investments in China?

Despite having one of the fastest-growing economies and the second-largest economy in the world, China is still underrepresented in the global stock market

Should you think about making an investment in China?

Over the past forty-five years, China has grown remarkably, becoming a land of superlatives. As the world's largest exporter and second-largest economy, it has experienced the fastest rate of urbanization in history over the last few decades.

"A lot of interesting things are happening in China, but no one has really been looking at it for the past few years," says Sharukh Malik, portfolio manager for Asian and Emerging Markets at Guinness Global Investors.

According to the World Bank, China's GDP has grown at an average annual rate of more than 9% since the late 1970s, and nearly 800 million people have been lifted out of extreme poverty. China now has an economy worth almost £19 trillion, second only to the US in terms of GDP, thanks in part to this.

When you consider the recent past, it may seem obvious to invest in the nation. However, for anyone looking to invest in China, the post-Covid era has been challenging. In 2021, 2022, and 2023, the MSCI China index dropped 22%, 22%, and 11%, respectively, as Chinese stock valuations were significantly impacted by COVID lockdowns and a regulatory offensive against the country's technology sector.

In addition, China's economy is still struggling with the ongoing real estate crisis and ongoing trade tensions between the US and China.

Nonetheless, there are indications that the outlook for Chinese investors is improving. In 2024, Chinese stocks gained 20% during the year, reversing a three-year downward trend. The index has now returned nearly 40% in 2025.

MSCI is cited.

Chinese technology stocks have been rising in tandem with this year's surge, especially since DeepSeek, an AI start-up, emerged.

At Hargreaves Lansdown, Kate Marshall, lead investment analyst, stated, "Confidence has been building thanks to improving economic growth, targeted government stimulus, and ongoing strength in innovation-led sectors like electric vehicles (EVs) and AI."

Then, how are Chinese stocks doing, and is it wise to invest?

Investment opportunities and challenges in China.

China's investment climate is evolving. Rewind to 2023, when the real estate market, geopolitical unrest, and a domestic regulatory crackdown were the three (very negative) themes that dominated sentiment.

"Some investors walked away," Linda Lin, head of the China equities team at Baillie Gifford, told the Association of Investment Companies showcase on 10 October.

However, Lin noted that there were signs of progress on the ground: government representatives had already begun to openly support private sector interests.

Lin stated, "Private companies are the economy; they are not the side story." They are responsible for 80% of urban jobs, 70% of technological innovation, and 60% of GDP.

Although Xi has been charged with putting ideology ahead of development in the past, this position has changed in the last few months. Lin claimed that Beijing had adopted a more practical stance during the past 12 months. "Now, the goal is to lean against the economic headwinds rather than tolerating them.

Aside from the boom and bust in real estate, the prospect of US tariffs is another clear reason why investors are worried. The possibility of trade barriers with the largest market in the world makes investors wary of making investments in China, even though tensions seem to be easing.

Even so, the US only makes up about 14% of China's exports, and these exports collectively make up less than 3% of China's GDP. Therefore, China's economy wouldn't necessarily go completely off course even if there was a significant disruption to the two nations' trading status from one another.

More than 140 countries in the world rank China as their top trading partner, surpassing the United States in this regard.

According to Malik, "America's share of the world GDP is falling." China's future lies in the emerging world, which is accounting for a larger share of the pie.

China moves up the chain of value.

Lin and Malik both describe China's rise to prominence as the global leader in high-end technology products as a move up the value chain, which may be the country's most important structural opportunity.

The nation's increasing dominance in cutting-edge technologies, like solar panels and electric vehicles (EVs), is especially clear evidence of it.

China produced more industrial robots in 2024 than the rest of the world combined, and the country produces 70% of the world's EVs and 75% of its batteries, according to the IEA.

Three factors, according to Lin, are at play here: a top-down industrial policy that prioritizes strategic sectors like semiconductors and artificial intelligence; a bottom-up layer of innovation spearheaded by Chinese entrepreneurs; and the size of the Chinese market, which "helps product innovation and increases adoption much faster than people think."

"The Chinese government is actively participating in the expansion of data centers to make them accessible to more companies," Malik says.

Malik envisages that the additional growth from these new pillar industries will outweigh the drag from real estate, and that this inflection point will occur either in 2026 or 2027. According to him, that might result in "10 or 20 years of solid growth" for China. Furthermore, industries that are currently greatly undervalued should be able to benefit from this trend without exposing portfolios to the high risk that Chinese AI can occasionally carry.

How to make investments in China.

Your exposure to China in your investments is most likely lacking.

As Lin notes, the majority of the world is: although the nation contributes 18 percent of the global GDP, it only falls 3 percent short of Apple in the MSCI All World Index.

Directly purchasing Chinese stocks can be difficult and will rely on your broker. For retail investors in the UK, American depositary shares (ADS) or receipts (ADR) are typically easier to obtain; however, certain brokers will grant access to shares listed in Hong Kong.

Among the stocks that may provide exposure to China's technological growth trends are the robotics company Midea (HK:0300), the battery manufacturer CATL (HK:3750), and BYD (HK:1211), which this year surpassed Tesla as the largest EV seller globally.

Industrials are a segment of the market that has "mostly been ignored by investors because they're just chasing AI," according to Malik, who supports investing in them.

He believes that when considering Chinese stocks, it may be wise to adopt a risk-averse investing strategy. "In China, the competition is just so intense," he claims. "If something performed exceptionally well the previous year, a million businesses could enter the market and eliminate the advantage.

He went on: "It's dangerous in China to place large bets on bad companies turning into good companies. Our general approach is to identify companies that have performed well in the past and have a solid track record, and then search for opportunities where the market is undervaluing their excellence.

Accessing Chinese stocks, including those listed on the mainland, that may be more difficult for individual investors to obtain otherwise may also be possible through funds and investment trusts.

Using an equal-weighting approach, the Guinnesss Greater China Fund and the China A Share Fund rebalance their portfolios to guarantee that each holding has a roughly equal allocation within the fund. Malik states, "You lock in the gains and bring it back to neutral when something gets too big."

Baillie Giffords China Growth Trust (LON:BGCG), on the other hand, is more focused on purchasing growth stocks and allowing them to run. The top holdings as of September 30th are Alibaba (HK:9988) at 7.7 percent, CATL at 3.6 percent, TikTok owner ByteDance at 8.8 percent, and Tencent (HK:0700) at 13.4 percent of the portfolio.

As an alternative, investors might decide on a pan-Asian fund that provides some geographic diversity.

Schroder Asian Alpha Plus provides exposure to China and a degree of Asian diversification. Marshall advises investors who want exposure to China without the volatility of a single-country fund to think about a more comprehensive Asian fund. "The Schroder Asian Alpha Plus fund makes investments in Asian nations. China, Taiwan, and Hong Kong currently account for more than half of the fund's investments. Additionally, it makes investments in developing nations like Vietnam and India.