Chinese stocks still offer some high growth prospects, though there are also plenty of headwinds as the government navigates elevated debt levels and a possible housing bubble.
Behind the scenes, the Chinese authorities are grappling with a variety of economic dilemmas. There are undoubtedly risks ahead as the government continues its attempts to ween the country away from leverage and cool a runaway housing market.
The Chinese government, however, is extremely keen for foreign investors to raise their allocation to the country, having taken measures to open up both its equities and bond markets.
MSCI All Country World Index
In June, the MSCI announced that Chinese equities had been granted a place in the MSCI Emerging Markets index, a sign of the country´s increasing acceptability as part of global investors´ portfolios.
Institutional investors had previously railed against the inclusion of China A-shares in MSCI´s index due to worries over the regulations surrounding China´s equity market and the related costs.
The reason for the sudden change of heart? MSCI claimed investors had warmed to the idea due to the success of China´s Stock Connect programme, which links Hong Kong with the Shanghai and Shenzhen stock markets on the mainland.
It means foreign investors are now able to tap the China A-share market without having to comply with the mainland´s capital restrictions.
Early this month, China took a further major step to opening up its capital markets to foreign investors with the launch of its Bond Connect scheme.
Following the success of the Stock Connect programme, which first launched in 2014, the fixed income equivalent means overseas investors no longer need to have an onshore account to purchase Chinese bonds.
China took the mantle of the second biggest economy on earth in 2010. It had already long since become a major barometer for international investors given its impact on global commodities demand as well as the increasing proportion of blue-chip corporate earnings derived from the country.
A big worry for investors over recent years has been the rampant price growth in China´s housing market and the growing levels of consumer and corporate debt in the country.
Some of China´s property hotspots have clocked up some spectacular growth over recent years. Since 2003, Shanghai´s second-hand home prices have risen by around 300%.
In recent years, meanwhile, some of the biggest rises in Chinese property have been registered in technology hub Shenzhen, which is commonly referred to as China´s “Silicon Valley”. The city´s home prices rose by around 75% over the two years to the end of 2016.
As house prices have risen, so have the nation´s borrowing levels. By the end of 2016, the country´s debt had ballooned to 260% of GDP.
Official figures showed China´s economy modestly beat expectations during the second quarter of 2017, with annual growth of 6.9%. However, to the chagrin of the Chinese authorities, much of the country´s economic growth is still coming from the housing market.
Despite government efforts to cool the market, property investment accelerated by 8.5% over the first half of the year, outpacing the 6.9% growth registered over the same period during 2016.
The latest available figures show new home prices across 70 Chinese cities rose by 10.2% year-on-year in 2017.
The Chinese stock market, meanwhile, has also been generating decent returns of late. Mainland Chinese equities have risen by over 20% in US dollar terms over the past year, outpacing a return of around 17% for global equities in general over the same period.
Overall positive economic news from China is helping to prop up Chinese equities as a whole, but the imbalances in its economy and the failure of the authorities to rein in rampant growth in the housing market means investors should tread carefully.