Why is this the worst time to buy Chinese stocks?


While China easily beats the coronavirus while all other countries struggle to contain it, you may be considering buying Chinese stocks now.

Seems like a no-brainer, right?

Unfortunately, such a decision would be a mistake, especially if you are drawn to the siren song of the Closed Fund (CEF) which I will name below. Because there is a storm threatening the stock market and the economy of the country, and few people are talking about it.

The funny thing is that despite all the so-called advantages Chinese companies are supposed to have: lower operating costs and weaker regulations among them, these stocks never really delivered.

If you had purchased the IShares MSCI China ETF (MCHI)
, which is a good indicator of Chinese stocks, 10 years ago you would have doubled your money. But you would have more than tripled your investment by focusing on the familiar names of the S&P 500. Even the low yield SPDR S&P 500 ETF Trust (SPY)
more than tripled their money and saw a lot less volatility along the way.

China faces many regulatory risks – at home and abroad

Part of the problem with Chinese stocks today is growing regulatory pressure, both inside and outside the country. Consider Jack Ma, CEO of Chinese internet giant Ali Baba
Group holding company (BABA)
. Once China’s darling, Ma has faced increasing government scrutiny for a number of reasons, leading Alibaba’s shares to follow the Chinese market.

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In America as well, the increasing control of Chinese companies’ transactions across the world has made it more difficult for many Chinese companies to register in the United States. And that scrutiny will intensify after President-elect Joe Biden enters the White House.

This may surprise you, because President Trump has been synonymous with being tough on China. Pressure from Trump’s camp caused the NYSE to pull out China Mobile (CHL), China Telecom
and China Unicom
Hong Kong (CHU)
. That’s a $ 150 billion market value that will be harder to reach American investors, and that’s just the start.

Biden has already made it clear that, at least on China, his stance doesn’t diverge from Trump as much as one might expect. He recently said he wanted “to hold the Chinese government accountable for its abuses on trade, technology, human rights and other fronts,” adding that “America’s position will be much stronger. when we build coalitions of like-minded partners and allies to make common cause. with us to defend our common interests and values. “

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In other words, Biden aims to build a coalition of countries to counter China on the economic front.

A fund with a 10.4% yield to avoid

This is a difficult political situation to invest in at the best of times, and in the early 2000s, such proclamations could have been dismissed by pointing out that declining regulations and China’s operating costs meant that Chinese companies were just too cheap for an investor. ignore. But China has tightened some regulations, and Chinese workers’ wages have exploded since (the chart below is in Chinese yuan per year).

China, a cheap option? Think again

This graph shows us that Chinese wages have increased by 1,400% over the past 25 years! This means that companies no longer relocate to China just for low costs, and this means that “relocation” to America (or other countries) is a more affordable option. And we’ve seen divestment from Chinese suppliers hit record highs in 2020, with more cash outflows to continue for the foreseeable future.

Combine the less attractive economic incentives to stay in China with the growing political hostility towards the country in America and elsewhere, and there are plenty of reasons why investors should shy away from Chinese stocks.

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So if you have MCHI, it is definitely time to sell, as well as any other ETF that invests in Chinese stocks.

And there’s another fund that many investors looking to capitalize on China have invested in lately, and you should avoid (or sell if you own one): the Morgan Stanley China A Share Fund (CAF), a CEF that offered investors a formidable dividend yield of 10.4% in 2020, thanks to a big special payment in December. This high yield makes the fund attractive to dividend hunters, and the fact that it trades at a 12.8% discount to the NAV (NAV, or the value of its portfolio) is also appealing, as that would seem to indicate it on the rise. the discount shrinks.

But I urge you to ignore this siren call. CAF’s focus on Chinese stocks makes it a risky fund for a Joe Biden presidency, especially when there are high yield funds that give you similar returns while being much better positioned for the direction in which the political winds are blowing.

Michael Foster is Senior Research Analyst for Contradictory perspectives. For more great income ideas, click here to view our latest report “Indestructible Income: 5 trading funds with safe 8.3% dividends.

Disclosure: none