What Are the Risks Associated With Investing in the Chinese Market?

In the last few years, despite the global economic crisis and a significant slowdown in domestic demand, industrial demand in China has continued to rise. The result has been sharp increases in valuations of industrial equipment, material and components. There is also some pressure from government policy makers as well as financial institutions in the aftermath of the credit crisis. There have been efforts by several large Chinese banks to gain greater exposure to the domestic markets by purchasing large chunks of listed companies in the mid and small cap stocks. This has resulted in some very significant share price appreciation in China.

But there are risks associated with investing in the Chinese market. One risk that prospective investors must be aware of is the possibility that the Chinese government will soon try to devalue the currency to try to increase competitiveness. If this happens the effect on industrial goods prices could be dramatic and quite unexpected. The other risk is that the rapid growth of Chinese industrial goods may only be a short term phenomenon and that once the economy recovers the gap between now and then may well widen again.

The Chinese economy is still growing at a healthy pace and there is no immediate sign that the slowdown that occurred early in the last decade is back. The biggest threat to the Chinese economy comes from domestic demand rather than foreign trade, which make industrial goods the most significant drivers of the Chinese economy. As such, the demand for these products is likely to remain strong even as China grows and develops more sophisticated methods of doing business. So it is far from clear that the recent uptrend in the value of the Chinese stock market reflects an improvement in the state of the nation’s economy or the direction of its future development.