Recently, while reading Hong Chun-wook’s Economic Topics, I explored the structural weakness of China's economy. The author presented a negative outlook on Chinese investments, citing demographic shifts and the urban-rural divide.
However, I see it differently. The FXI, a prominent Chinese large-cap ETF, has risen by about 20% this year, and global giants like Tencent, Alibaba, and Xiaomi continue their steady growth despite U.S.-China trade tensions and economic slowdowns. These companies hold significant global influence, and avoiding Chinese stocks solely due to market concerns may not be a prudent choice. Hence, I believe that instead of outright avoiding Chinese stocks, investors should focus on valuation to identify opportunities.
China vs. U.S.: Valuation Comparison
A key metric for stock market valuation is the P/E ratio (price-to-earnings ratio), which represents how much investors are willing to pay per unit of corporate earnings. A higher P/E ratio suggests overvaluation, while a lower P/E ratio indicates undervaluation. To compare Chinese and U.S. stock valuations, I examined the P/E ratios of FXI (China’s top 50 large-cap ETF) and VTI (an ETF covering the entire U.S. stock market).
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| P/E Chart, Compare to all world stock Index |
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| P/E Ratio for each countries |
As of June 16, the projected P/E ratio for FXI is 9.99, which falls within the five-year average range of 8.87–13.03, meaning the market is at a fair valuation. In contrast, the U.S. stock market, represented by VTI, has a P/E ratio of 24.45, exceeding its five-year average (20.06–23.81) and indicating an overvalued status.
Compared to other countries—including India, Australia, Germany, and Japan—China’s P/E remains low. Even when benchmarked against Brazil’s stock market, China is undervalued on a global scale.
This suggests that Chinese stocks are historically cheap, while U.S. stocks are relatively expensive.
Why Is China Undervalued?
Several factors contribute to China’s low valuations:
- Economic Growth Slowdown – Post-pandemic domestic market contraction, continued real estate crisis, and rising youth unemployment
- Government Policy Risks – Strict regulatory policies under Xi Jinping’s administration, causing a decline in foreign investor confidence
- U.S.-China Trade Tensions – Tariff policies and intensified tech competition under Trump-era trade wars, accelerating U.S. corporate exits from China
- Taiwan Risks – Geopolitical instability, leading to capital outflows from China
Due to these factors, foreign investors remain cautious, resulting in continued low market valuations.
China’s Advanced Industries Are Growing
Despite these concerns, China’s AI, semiconductor, and renewable energy sectors are rapidly growing with strong state support. Leading Chinese companies include:
- SMIC – China’s largest semiconductor manufacturer, holding about 5% of the global market share (2024 data)
- BYD – The world's top-selling EV maker
- CATL – The largest global EV battery manufacturer, commanding 37% of the global market share
Moreover, Chinese AI leaders like Baidu, Tencent, and Alibaba continue to dominate the global industry.
China’s government is actively fostering semiconductors, AI, and aerospace technologies through significant investments, infrastructure development, and consumer stimulus policies. Amid escalating U.S.-China tech competition, China is building its own independent technology ecosystem to reduce reliance on U.S. firms while expanding its global influence.
China ETFs: Recent Rebound & Long-Term Prospects
As noted earlier, FXI and other Chinese ETFs have shown a recent rebound, suggesting potential long-term investment opportunities. Meanwhile, India—often seen as China’s alternative—has reached an overvaluation phase, with MSCI India’s P/E ratio at 24.40, approaching U.S. levels. While India’s economic growth remains strong, the global supply chain still relies heavily on China, allowing for possible market recovery.
However, investing in Chinese stocks requires careful consideration of risks:
1. Political Risks
- Xi Jinping’s strict regulations: Increased restrictions on corporate activities and market censorship
- Potential exclusion of foreign firms: China’s push for domestic technological self-reliance may limit access for overseas businesses
- U.S.-China trade war: Ongoing tensions in semiconductors, AI, and cloud industries
- Taiwan disputes: Rising military concerns threaten global supply chain stability
- Weak domestic consumption: Declining consumer spending and rising youth unemployment
- Real estate market crisis: Increased local government debt, slowing economic growth
- Capital outflows: Investors shifting from China to India in recent years
- Corporate transparency concerns: Lack of accounting and operational transparency among Chinese firms
Investment Strategy for Chinese Stocks
Despite China’s undervaluation, investors must assess risks carefully. Balancing portfolios and focusing on high-growth industries like AI, semiconductors, and tech sectors is crucial. Additionally, maintaining a diversified approach across the U.S., India, and other markets remains advisable.
Ultimately, China’s stock market is undervalued, but macroeconomic weaknesses and political risks persist. However, with government-backed industrial growth and rebounding ETFs, investment opportunities may emerge. Strategic adjustments—considering volatility while observing China’s economic recovery and global investment trends—will be necessary for long-term success.
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