Risks of Investing in China

Another brick in the trade war wall between the USA and China was laid last week when the White House suggested that Chinese stocks might be delisted from U.S. stock exchanges. Stocks fell briefly before a White House spokesperson denies the “rumor.” We have written for years about the risks of investing in China. A few years back we discussed the flight of capital from China. Wealthy Chinese were taking the money they made during China’s economic rise and using it to start businesses, buy property, and simply move their money out of China. One of our questions on that subject was whether or not more capital would be invested in the USA. The “delisting” issue could work the same way while, at the same time, hurting China’s ability to raise capital from foreign sources. Add this issue to the risks of investing in China.

Will Trump Delist Chinese Stocks?

Reuters reported the possibility of delisting and the fact that U.S. investors have billions at risk in Chinese stocks.

U.S. fund managers, especially, are heavily invested in Chinese stocks, which is what worries the folks at Reuters. But regular investors may hold ADR shares of Alibaba or JD.com. Will these companies end up listing on other exchanges and will U.S. investors follow them? The suggestion of delisting may be just a game of “chicken” as part of the trade war.

Risks of Investing in China

But, other risks are real. China’s economy is slowing down and the Chinese Communist Party is not taking the steps needed to liberalize, give up central control, and move away from its export-dominated model. Their level of debt is high and is growing rapidly. The collapse of the 1980s Japanese economic miracle comes to mind. There is evidence that Chinese policymakers are studying what happened when Japanese debt situation made their economy implode and go into thirty years of stagnation.

If China ceases to grow at its former pace or has an economic hard landing, which stocks in China will be hurt and how should you adjust your investments in that market? Alibaba may have had the benefit of a lot of hype when it got started but it seems to be well-diversified and active in the growing internet-sales niche. This may be your safest bet if you stay with a Chinese stock. But, what happens to your ADR shares if delisting occurs?

What Is Really Happening in China and How Does It Affect Your Investments?

For years the baseline concern about investing in China has been the concern that economic numbers have been fudged and that the government publishes data that it wants investors to see and not data that could help investors direct their investing. That will probably not change in the near future.

For the time being, the threat to “delist” is probably just a threat. But, if the trade war really does become permanent, you can expect to see delisting of Chinese stocks and a lot more. But, at that point, you will invest a greater portion of your portfolio in US stocks, as will Chinese investors who have pulled their assets out of China.