Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

China’s stock market lags its economy: Charts of the week

Lewis Jackson  |  05 Oct 2021Text size  Decrease  Increase  |  
Email to Friend

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.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

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.

Is there a trend you'd like to see visualised? Get in touch.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend