China has burned investors before too

The smartest strategy for investors in Chinese assets this year: Do something else. Sitting on cash was more profitable in 2023 than investing in Chinese shares, buying bonds sold by Chinese companies or betting on the performance of the yuan, the country's currency.

- Matthew Thomas

In many cases, even throwing throwing away 5% or 10% of your cash would have been less costly.

China's CSI 300 stock index is down about 14% this year, putting it on track for its third consecutive year of declines. Hong Kong's Hang Seng Index, which includes the shares of many Chinese companies, is on course for four years of losses.

The prolonged slump in Chinese assets is raising serious questions about the benefits of investing in the world's second-largest economy. The risks are relatively clear, most obviously the great-power rivalry with the U.S. and the chance of conflict in the Taiwan Strait. But what about the rewards? Some Wall Street analysts say the rewards are coming, predicting that cheap stock prices, improving earnings, and government support in areas such as renewable energy will help drive China's stock market higher next year. But even the bulls don't think a stock market rally in 2024 will make up for the heavy losses of the past few years.

At the start of 2023, investors were even more optimistic. Portfolio managers bet that the end of China's draconian COVID-19 policies would lead to a rapid economic recovery. The hope was that consumers finally freed from lockdown would celebrate with a spending boom. They did, briefly but since then the country has fallen into deflation and economic malaise.

"The biggest problem is that at the beginning of the year, the China trade looked like a guaranteed winner. But anything that you tried to buy has been disappointing," said Ben Bennett, a senior investment strategist at Legal & General Investment Management.

"It wasn't just that China was the wrong theme. Everything in China fell. You were lucky to have not got sucked in and just been watching it." China's weak performance this year looks even worse given bull markets elsewhere.