China’s stocks surged by 60% in three months late last year (as shown by the black line), following the news of the country’s reopening. However, the market has since stabilized 13% lower than its peak in January (as depicted in the chart), with much of the early optimism fading away. There are several reasons behind the pullback, including concerns about the slowing recovery momentum, foreign technology bans and restrictions, labor market pressures, and low private sector confidence. Nevertheless, there are still plenty of good reasons to consider investing in Chinese stocks.

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To begin with, the Chinese government is committed to driving growth and has eased up on regulation. During the China Development Forum, a top official reassured foreign businesses that the economy will open up further, following the launch of the “Invest in China Year” campaign.

Moreover, although China’s 5% growth target for this year might seem modest compared to its past performance, it would still be significantly higher than what developed economies like the US or Europe are expected to achieve. China’s unique economic and policy cycles also mean that the country is less susceptible to financial contagion and economic slowdown risks, making it a good diversification option for investors.

Lastly, Chinese stocks remain undervalued, despite the rally last year. The benchmark MSCI China Index has a price-to-earnings ratio of only ten, compared to 18 for the S&P 500. Furthermore, foreign investors do not allocate a significant portion of their portfolio to Chinese assets, which means that price risks for the country’s stocks are skewed to the upside if there are any positive economic surprises.

Although investing in China carries risks, the Chinese stock market might offer a good opportunity for investors looking to increase or maintain their returns at lower risks. The benchmark index is not only cheap but also more diversified than the economy, with attractive growth prospects in consumer discretionary and communication services sectors. To invest, one could consider the iShares MSCI China ETF (ticker: MCHI; expense ratio: 0.58%) or take a more active approach by investing in the JPMorgan Active China ETF (JCHI; 0.65%).

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