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China economy
Opinion
Nicholas Spiro
Nicholas Spiro

Macroscope | Why investors in emerging markets can’t easily abandon China

  • A growing number of investors in developing economies are carving China out of their portfolios, but they are merely trading one set of risks for another
  • Fund managers cannot ignore the influence China has over emerging markets, especially in Asia, and alternatives are not as cheap as they used to be

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Visitors at Yuyuan Garden in Shanghai, China, on December 23. An abrupt surge in foreign buying of Chinese bonds raised hopes that pessimism about the nation’s assets may be overdone. Photo: Bloomberg
Nicholas Spiro
Is there no let-up in the meltdown in China’s stock market? After losing a further 11 per cent last year, the CSI 300 index of Shanghai- and Shenzen-listed shares suffered its worst start to the year since 2019, dragged down by persistently weak economic data.

Since its peak in 2021, the CSI 300 has fallen more than 40 per cent. The decline in the MSCI China Index – which tracks Chinese stocks listed at home and abroad – has been even sharper, with the gauge falling nearly 60 per cent. Foreign purchases of Chinese shares via trading links with Hong Kong fell to their lowest level on record last year.

Still, the dramatic deterioration in sentiment towards the world’s second-largest economy did not prevent the MSCI World Index – a gauge of equities in advanced economies – from rising 22 per cent in 2023, mainly because of the 70 per cent weighting of the United States in the index. US technology giants, commonly referred to as the “Magnificent Seven”, turbocharged the rally in US and developed market stocks.
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Yet, it is the performance of emerging-market equities that is more striking. The MSCI Emerging Markets ex China Index, which monitors stocks in developing economies other than China, surged 17 per cent last year despite mounting concerns about China’s economy.

What is more, the assets held by the largest exchange traded fund (ETF) tracking the emerging market ex-China index surpassed those held by the biggest China-focused ETF for the first time, having risen sharply in the final quarter of 2023. Three years ago, the China ETF was more than 50 times bigger than its emerging market ex-China counterpart, according to Bloomberg data.

The shift away from China in emerging-market investment portfolios has been gathering steam for some time. The combination of Beijing’s draconian zero-Covid policy, the weaker-than-expected recovery following the reopening of the economy and heightened regulatory and geopolitical risks led to a surge in demand for emerging-market investment products that exclude China, particularly Asia ex-China products.
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