However, these funds came bounding back in 2024, with IA China becoming the fifth-best performing Investment Association sector of the year as returns leapt 13.8%.

This strong performance contrasted with prior years, with eleven funds making total returns upwards of 20%, and only two portfolios – Guinness China A Share and Fidelity China – reporting losses.

See also: Is China at a turning point, or will it disappoint yet again?

It begs the question: should investors be re-considering an allocation to China funds within their portfolios? Those with a sturdy risk appetite should certainly be eyeing up the sector, according to Chelsea Financial Services managing director Darius McDermott, who said China has some of the highest return potential on the market this year.

Bold stimulus plans from the People’s Bank of China (PBoC) are what propelled Chinese equities in 2024, and further measures to revive China’s economy and stabilise its property market are expected in the months ahead. These new stimulus announcements could again push China funds to new heights, according to McDermott.

See also: Chinese markets soar following announcement of ‘aggressive’ stimulus package

Yet the readjustment last year was sharp and fast, making it easy to miss. The IA China sector shot up 20.7% in the week following the PBoC’s announcement in September before levelling out, where it has stayed ever since. Investors who want to bank on another round of stimulus plans stimulating the market should act fast, or risk being left behind, McDermott warned.

“It shot up in a very short period of time, so if you’re waiting for another stimulus announcement, be ready to pull the trigger, because it won’t wait for you,” he added.

Tariffs could extinguish hopes for growth

There is one overbearing factor that could turn China’s outlook from hopeful to grim – tariffs. Trump’s proposed 60% tariff on Chinese imports to the US could offset the positive sentiment injected by upcoming stimulus announcements and plunge China funds’ returns back into the red, according to McDermott.

See also: How will Trump’s tariffs impact markets?

Until further details are shared on the extent of tariffs and stimulus plans, the potential outcomes for China funds remains stark. Investors stand to make some high returns from the Chinese market in 2025, but could equally lose just as much, according to McDermott.

“You can’t have a low risk way of investing in China. If you’re investing in China, you are seeking superior returns, and for that you must expect superior risk,” he added.

“If Chinese equities went up 40% this year I wouldn’t be surprised – but equally if they went down 40% I also wouldn’t be surprised. When you’ve got such a wide spread of potential outcomes, it really shows the inherent volatility in that market.

See also: China’s AI breakthrough causes US tech stock tumble

“There is more stimulus to come after the tariff position is understood, and that could be a catalyst as it was last year for a sharp upward tick. But the lingering threat of course is China’s interest in Taiwan – that question mark refuses to go away.

“And with the Communist Party of China becoming more authoritarian under Xi Jinping, all those question marks still have people feeling uncomfortable about investing in the region.”

Despite investors’ hesitancy to reallocate to China, Ben Yearsley, director of Shore Financial Planning, said China funds are “cheap and fascinating”. Share prices in the region have dropped sizably amid the downturn of the past few years, presenting an appealing entry point for those with the right risk tolerance.

See also: A World Of Higher Inflation 2025

Yearsley is continuing to buy funds such as Fidelity China Special Situations and Matthews China Discovery, which are up 18.1% and 16.6% respectively over the past year.

The former is trading at a 12.7% discount to its net asset value (NAV), which could provide investors with a slight buffer should returns tumble.

Will the new measures aimed at bringing economic growth back to its 5% target mark an inflection point for China and pave the way for high returns, or will it fizzle out and disappoint as it has done so many times before?

Here, Portfolio Adviser speaks to two fund managers with very different views on the future of China.

China will do everything it takes to jumpstart the economy

While the Western world has encouraged its population to spend over the past ten years, which has powered its markets through an agitated economic landscape, the name of the game in China has been to save.

As a result, China has put its economy in a somewhat opposing position, waging a battle on deflation as the Federal Reserve and Bank of England attempt to lower to 2%. In an effort to not add onto debt, China has opted to hold strong on interest rates to prioritize currency stability.

Yet as China takes its own route through a period of economic turmoil, it also is facing the end of two long-term economic cycles. On a global scale, the country contends with a divergence from trade integration that has dominated the past 20 years. And within China, it faces the end of a 10-year economic cycle that has relied heavily on investing in the supply side of the economy to stimulate growth.

See also: Chinese markets soar following announcement of ‘aggressive’ stimulus package

Andrew Swan, head of Asia ex-Japan equities at Man Group, said: “You’ve got a combination of these things happening together, and as a result, you get a very weak economy. And the problem China has is overcapacity with weak demand, and that creates deflation, which then exacerbates the problem. So we’re kind of at that important point in time where China needs to come up with something new.”

But now, the global economy is shifting, and China has taken its queue as the value of its currency increases. Less than a week following the Federal Reserve’s pivot towards interest rate cuts, the People’s Bank of China and Chinese regulators announced a 50 basis point cut to its reserve requirement ratio and a decrease of benchmark interest rates.

“The currency has started appreciating almost to the day that it looked like the Fed was almost guaranteed to cut rates. They’re facing now a strong currency, so they can loosen as much as they want on monetary policy to stimulate the economy,” Swan said.

“The economy has been facing big, long term headwinds. But in the short term, China has been running monetary policy which is totally contrary to the way you should be doing things. But we’ve just reached an inflection point in that.”

Swan believes that the “jolt” needed for the Chinese economy has started with this week’s announcement.

“The government came out today saying ‘line in the sand here, we are going to do what it takes’. They haven’t said it explicitly, but I think effectively, that’s where we are,” Swan said.

“They understand the problems. They understand the risk of not turning this around. And what you really need now is a direction from the top to tell people now is the time to change. You need that Draghi moment. And I think they’re kind of almost there.

“If you think about what Draghi did in 2011, he saved the world by saying, ‘We will do whatever it takes’. They didn’t actually do anything, but at the end of the day, it’s that commitment that gets the private sector to do the public sector work. And that’s what China’s about to try and do. Give it the commitment to say we’ll do what it takes, but that signal line will mean the private sector does it.”

See also: Macro matters: Why managers are buying China again

While this week’s announcements could be the start of “doing what it takes”, Swan said the changes in policy on the horizon for China go much further. While these movements address some of the symptoms of the issues, Swan said China is also going after the cause. This will largely come down to incentivizing the population to spend, not save.

“Up until now, they’ve been focused on the supply in the economy, like self-sufficiency in high tech areas and new renewables. But now they have to put that focus on the demand in the economy. And if they can get more demand in the economy, you break this death spiral of prices falling,” Swan said.

“You start to get a bit of pricing power back. That means you break this deflationary cycle. It doesn’t really matter to me how significant it is, but it’s the direction of change which is most important, because if you can rebuild expectations of prices increasing into the mindset, then people will start consuming today. The biggest problem with deflation is people think prices will be cheaper in the future. So they save today, because they can get things cheaper in the future.”

But in an economy that has been conditioned to save, what causes people to start spending?

Swan believes this will begin with changes to China’s Hukou system, which currently means that social benefits are linked to one’s birthplace, not where they currently reside. Changes to this program could mean the removal of property ownership restrictions in places like Beijing and Shanghai. It could also mean placing monetary values on the plots of land given to families, which could allow for more flexibility of funds and urbanisation.

“This is not a quick fix, but it’s a change in direction from where we’ve been which I don’t think the market is fully appreciating, but I think we’re on the doorstep of this happening. It’s a really long-term, positive, incremental change,” Swan said.

“It won’t be the old China, but it certainly would be better than what we’re seeing today.”

A rally in Chinese equities never lasts

There will always been commentors singing China’s praises and proclaiming that an elusive rebound is nearing, but the truth is in the numbers. After decades of false starts and no returns to show for it, those false claims become background noise, according to Jupiter Asian Income manager Jason Pidcock.

“The pattern is that every now and then there’s a flurry of excitement around Chinese equities which is followed by a sharp move up, but then fairly quickly they go back again. And that has happened more times than I can remember over the last 30 years.

“There’s always been people saying things like ‘it looks relatively cheap’ and ‘it’s due a period of outperformance’ but I’ve learned to ignore those kind of messages.

“And you hear messages like that all the time. Every now and then Chinese equities do have a bounce and they’ll say ‘oh look I’m right,’ but every rally over the past 30 years has petered out fairly quickly.”

This happened in most recent memory when China lifted its Zero-Covid measures in late 2022. Disillusioned investors piled into Chinese equities after being promised that it was a turning point for the long-beleaguered market, but by the end of 2023, the MSCI China index had lost them another 16.2% throughout the year.

And this has happened time and again over the past decade. An investor who bought in at the peak of the 2014/15 rally – which was fuelled by a double whammy of government reform and the launch of the Shanghai-Hong Kong Stock Connect that spurred global enthusiasm – would still be down 7.3 percentage points to this day.

Investors who are being told that a resurgence in China is forthcoming would do well to take it with a pinch of salt, according to Pidcock. Especially considering that the market’s outlook today is worse than it has been in decades.

“I began investing in this region towards the end of 1993 and in that whole time Chinese equities have been pretty much the worst performing in the world,” Pidcock said. “And that was over three decades when its growth rate was one of the highest in the world.

“They started that period with low levels of debt – now they’ve got a lot of debt. And it was a period where foreign direct investment was piling into China – now it’s coming out of China. So if China was ever going to outperform, it would have been over the last 30 years.”

Despite having all these drivers behind it – ones it has now lost – the Shanghai Composite index is up roughly 50% since the start of Pidcock’s 30-year career. “That is a truly abysmal return,” he said. “I can’t find a market that’s done worse than that.”

While decisions made by the People’s Bank of China in recent days have attempted to solve some of the nation’s economic woes, the market is still littered with “so many different challenges” beyond that, according to Pidcock.

China is tackling a rapidly aging population over the long-term, with over a quarter (28%) consisting of over 60s by 2040 according to the World Health Organization, making it the fastest growing aging population in the world.

In addition to this, China is plagued by political volatility and policy uncertainty, which has turned foreign direct investment negative for the first time in decades, according to the International Monetary Fund.

See also: Fidelity’s Dale Nicholls remains ‘cautiously optimistic’ on China

After being burnt by one too many false dawns and with little to look forward to in the region, Pidcock cut China out of his £2bn Jupiter Asian Income fund in 2022. And performance has been all the better for it.

Pidcock’s fund is up 24% over the past two years whilst the average IA Asia Pacific ex Japan fund trails far behind at 4.9%.

It was the Chinese government’s crackdown on private education and technology in late 2021 that initially made Pidcock question his holdings in the region, and the more hostile signalling that ensued was the final nail in the coffin. With the situation only having worsened since, Pidcock has not looked back.

“We felt that we had to take heed of that warning, and I don’t think anyone else had. I’m not aware of any other Asia Pacific funds that reduced their China weighting so dramatically, let alone go to zero. But it has very much helped our relative performance, and the messaging has only worsened since then,” he said.

“I still have 100% conviction that was the right thing to do. I’m highly unlikely to invest in a Chinese business for years rather than months.

“Ultimately, I try to minimize unnecessary risk in everything I do, and I see investing in China as an unnecessary risk when there are much safer markets.”

However, Capital Economics’ group chief economist Neil Shearing believes it would take a “full-on Chinese hard landing” to sufficiently degrade the global outlook, which he believes is unlikely.

According to China’s latest inflation figures, headline CPI fell 0.3% during July – in part caused by lower energy prices. Core inflation has also been falling within ‘shelter’-related categories, according to Liao, with household furnishing, equipment and property maintenance all sliding in price growth.

See also: Antipodes Partners: How troubled China is changing tact to take trade market share

This has been sparked by yet more complications for the country’s real estate sector, with property developer giant Country Garden on the brink of default and Evergrande having filed for bankruptcy protection in the US.

China is therefore facing a property-induced debt crisis – given these companies are likely insolvent – with the country’s Hang Seng Index having recently fallen into bear market territory.

Real estate represents a large proportion of China’s economy and there are therefore concerns that a Lehman-style collapse could be on the cards and create further deflationary pressure on China, in addition to increasing deglobalisation and a subsequent fall in exports, a weakening yen and a lack of large-scale fiscal stimulus from the People’s Bank of China.

But despite more and more economies moving away from importing goods from China, Liao does not think deflationary pressures are “only for China”.

“While disruptions and changes to post-pandemic economies have raised questions about the extent to which the Chinese economy still dominates global trade and industrial cycles, we see several reasons to expect spillovers to intensify in developed markets,” she said.

Made in China

Firstly, the China economist argued that Chinese-manufactured products still dominate the consumer goods sector – in particular in the US.

“US core goods consumer price inflation appears to be following the typical lag between the recent declines in the exchange-rate adjusted purchasing price index (PPI) of China’s consumer goods,” Liao pointed out. “According to US Census Bureau data as of June, prices of goods imported from China are down 3% on average versus last year, while producer prices of consumer goods in China are down 5% in dollar terms.

See also: Is China a ‘dead weight’ in emerging market equity funds?

“Importantly, these declines are being passed on to US consumers; July marked the first time since the early days of the pandemic that US consumer retail goods prices declined on a three-month annualised basis.”

She added that, given other developed countries’ inflationary trends have been correlated to the US since the Covid pandemic, slowing growth in US prices is “likely to eventually show up in the inflation metrics of other developed markets”.

Sale of goods overseas

While exports from China are falling and are expected to continue to do so over the short term, Laio said Chinese policymakers could try to boost the country’s growth by encouraging more sales overseas, in a bid to resolve domestic oversupply issues.

“This already appears to be happening in Germany, as Chinese exports of lower-cost electric vehicles have recently surged, while domestic price cuts may spill over into other countries,” she said.

However, Capital Economics’ Shearing said that while China is “clearly a hugely important part” of the world economy, its influence on the global cycle is “often overstated”.

“The relationship between growth in China and growth in the rest of the world is not particularly strong,” he argued in a note published on the Capital Economics website on Monday (21 August). “Also, despite China’s size, it has not been a source of significant net demand for other economies.

“Admittedly, when measured as a share of global GDP, China’s current account surplus has fallen back from the highs seen in 2021. But the fact that it remains positive means that China is still a net drain on demand at a global level.”

Market versus economy

Shearing added that, over the years, economic uncertainty in China has led to market dips on a global basis. However, he argued this is sentiment-driven, given investors perceive the country to be a significant source of global demand, in addition to the fact it accounts for a large proportion of revenues from the likes of Apple and Tesla – which make up a disproportionately large part of the US stock market.

See also: India poised to replace China as core emerging market allocation

“It is possible that weakness in China could have little bearing on other major economies, but still cause significant dislocation in financial markets,” Shearing said.

Headwind to commodity producers

The level of risk that a structural slowdown in China presents to developed markets is also “misunderstood”, according to Shearing, who explained: “While this will arithmetically pull down global GDP growth over the next couple of decades, and will be a headwind to emerging market commodity producers such as Brazil, Chile and Zambia, we do not think it will have a significant bearing on the long-term growth outlook for the US or Europe.”

He added that a move towards deglobalisation and rivalry between the US and China will likely have a greater negative effect on multinational corporations headquartered in developed markets, than it will on the GDP growth in the actual economies.

“While vulnerabilities in China’s economy are mounting, [a negative global impact] isn’t our base case,” Shearing said. “Instead, the effects of a slowing China are a greater problem for those global firms and commodities producers that do business with it.

“Worries about China’s impact on the global economy are continuing to dog markets, showing how little has been learned over the years.”

However, Liao said global deflationary factors still remain in place such as a decline in commodity prices – a factor which China is “an important determinate of”.

“Deteriorating Chinese economic fundamentals have produced deflationary pressures that are already moderating inflation both in China and in the global markets served by Chinese goods,” she argued. “Given the usual lags, deflationary spillovers have likely only just begun to impact global consumer markets, with discounting likely to accelerate over the coming quarters.”