Invest in China as the Country Comes Back Into Fashion

Why It Matters

The divergence between China’s macro growth and its stock returns creates a high‑potential, yet risky, entry point for diversified portfolios seeking exposure to the world’s second‑largest economy.

Key Takeaways

• China’s MSCI index trades around 11x forward earnings, offering value.
• Property prices fell 40% from 2021‑2025, hurting household wealth.
• Evergrande carries roughly $300 billion in liabilities, highlighting debt risk.
• Chinese cars now 1 in 7 UK sales, up from 1.3%.
• Active China funds delivered ~25% tech‑driven returns over past 12 months.

Pulse Analysis

The narrative around China has shifted dramatically as younger Western audiences embrace its culture and tech prowess, a trend reflected in Pew Research data showing a 56% favourable view among 18‑34‑year‑olds. This soft power boost coincides with China’s export surplus of roughly $1.2 trillion, underscoring its deepening integration into global supply chains. While the country’s GDP now stands at 65% of the United States, per‑capita income remains modest, highlighting a still‑large domestic consumption gap that policymakers are eager to close.

Investors must grapple with the lingering fallout from the property bust that erased 40% of home values and left the Evergrande conglomerate burdened with about $300 billion in debt. The crash exposed the fragility of relying on real‑estate as a wealth store, prompting a pivot toward state‑backed industrial initiatives in electric vehicles, batteries and AI. These sectors are benefitting from virtually unlimited credit lines, allowing Chinese firms to flood overseas markets, albeit at razor‑thin margins, and to out‑produce many Western rivals.

From a valuation perspective, the MSCI China index’s 11‑times forward earnings multiple is a stark contrast to the lofty multiples seen in many developed markets, offering a tangible margin of safety. Active managers such as Fidelity, JPMorgan and Baillie Gifford have capitalised on this gap, delivering roughly 25% returns driven by tech and consumer stocks while avoiding low‑quality state banks. For investors willing to accept geopolitical and regulatory risks, a modest allocation—well above the current 2.9% weight in global indices—could capture both momentum and value in a market that appears to be entering a new, more attractive phase.