The bull and bear case for investing in Chinese stocks

Some investors believe it is, while others, not so much. Investing in Chinese stocks has been a game of Russian roulette — with losers losing big. Just how bad? The KraneShares CSI China Internet ETF (NASDAQ:PGJ), a basket of Chinese internet stocks, is down nearly 50% since February.

Investors go bottom fishing

In 2021, the Chinese government shifted policies towards emphasizing wealth equality and national security. To do so, China enforced regulations across various sectors, cracking down on education, internet, property, gaming and healthcare — just to name a few.

As a result, valuations have gotten so cheap, it’s making investors wonder if they should jump back in…

• JD.com (NASDAQ:JD) — which averaged 33% annual sales growth in the past 5 years — is trading at a 0.7x price-to-sales multiple.
• Pinduoduo (NASDAQ:PDD) — which averaged 89% sales growth in the past 5 years — is trading at a 9x price-to-sales multiple.

Both these profitable e-commerce giants are significantly cheaper than similar US counterparts. With US markets at record valuations, it’s hard not to be tempted by the Chinese market and its much lower valuations.

The bulls are out

In the past week, the Chinese tech sector made strong upward moves on news of:

• Meituan (OTC:MPNGF), the Chinese food delivery app hit with a $500M fine for antitrust. The good news? It wasn’t as high as expected.
• Charlie Munger, the business partner of Warren Buffett, doubled down on Alibaba (NYSE:BABA) — the e-commerce giant down 47% in the past year.

According to Charles Schwab’s global investment strategist, it’s been a bear market nearly every year (17 of the past 20 years) in China due to policy issues. But investors willing to put up with the volatility in the Chinese market benefited from higher returns.

And ultimately, the government wants economic growth to improve the quality of lives — which in turn should benefit China’s economy in the long term.

Investors: But the bears don’t sleep

The Chinese government’s unexpected moves are still keeping investors up at night. Even without government intervention, Chinese stocks have various risks:

• Evergrande’s collapse could hit Chinese consumers with falling property prices and lower consumer spending.
• Chinese stocks are at risk of being delisted from the US markets with the US-China relationship tense from ongoing trade wars.

Daring to invest in Chinese stocks? The CEO of Man Group Plc advises investors to be flexible and look towards a shorter time horizon.