China’s economic growth is the envy of the world. Gross domestic product (GDP) has grown by an average of 8.7% a year since 2000, versus 1.8% for the US and 2.6% for the world, according to the World Bank. For many, that growth makes China an unmissable opportunity for investors.
“It’s a part of the world that one can’t neglect and not only because of the opportunities it provides but you lose the excitement if you’re not there,” Ray Dalio, manager of the world’s largest hedge fund, told Bloomberg in September.
But world class economic growth has yet to translate into world class share market returns. An investor who put $10,000 into Chinese equities in 2011 would have $33,000 today, about half the $64,000 had they chosen US equities.
The Morningstar China index had an annualised returned of 9.4%, versus 16.8% for the Morningstar US index over the last decade. Over the same period, MSCI World returned an annualised 13.3%.
Chinese equities clocked three years of negative performance between 2010 and 2020, compared to just one for the US. Two of those three drawdowns were double digit losses.
Underperformance has widened recently thanks to regulatory crackdowns that have left Chinese equity markets reeling. The one-year return for Chinese equity markets sits at -7.3%, versus 30.4% for the US, as of the end of September.
Research in 2013 showed that above average world economic growth only twice coincided with above average stock market returns for the years between 1980 and 2012.
Many reasons are given for the disconnect between economic growth and share performance in China. Tighter monetary policy, the outperformance of US tech stocks, continuing barriers to foreign investment, recent tussles over trade, and the difficulty navigating the regulatory complex are all relevant, says Stephen Miller, adviser at GSFM funds management.
“The fact you can be blindsided by a regulatory swipe means a discount may need to be applied to Chinese equity markets, notwithstanding its impressive growth,” he says.
For investors, the lesson is to approach long-term investment themes with caution. Cars were the “place to be” in the US at the turn of the 19th century, but only 3 of the 2,000 odd car companies survived. Electric vehicles have a future but it’s doubtful Evergrande’s EV division will be there to enjoy it.
China’s rapid economic growth doesn’t guarantee outsized investment returns. GDP growth does not automatically translate into stock market returns.
