Are UK investors going to get burned by volatile Chinese stocks?

The Chinese stock market is on a roll, seeing its best week since 2008 followed by its worst day since 1997 since the country’s central bank announced sweeping stimulus measures.

The seesawing back and forth experienced by UK investors diving into the Chinese stock market might be scary, with many worrying the strong growth over the last few weeks may now be on the decline.

The Shanghai Stock Exchange’s CSI 300 Index fell seven per cent yesterday, its worst day since February 2020, while Shenzen’s Composite Index dropped 8.6 per cent, its sharpest fall since May 1997.

Despite the drop-offs, both are up by more than 15 per cent over the last week, with Shenzen’s stock market rising 30 per cent in the last month.

Chinese stocks were widely viewed as undervalued before the significant policy action taken by the country’s central bank, which included cutting its benchmark interest rate by 50 basis points.

“Prior to the recent stimulus package, Chinese stocks were trading at trough multiples and fund flow data was showing how out of favour the asset class had become,” said Mark Preskett, senior portfolio manager at Morningstar Wealth.

“At the same time, many of the large index constituents – like Tencent – were generating positive earnings growth and profits for shareholders.”

The combined daily turnover on the Shanghai and Shenzhen Stock Exchanges surged to a record 2.6 trillion yuan following the stimulus announcement, more than triple of the daily average of 793bn yuan for the year.

A lot of that money has come from British investors: The largest China trust on the UK stock exchange, run by Baillie Gifford, saw its stock price surge almost 40 per cent in just two weeks, before coming down by around nine per cent over the last couple of days.

UK-listed stocks that benefit from a strong Chinese economy have also received a massive payoff, like luxury fashion brand Burberry, with its share price surging 16 per cent in only two days. The group is still up by the same amount over the last month.

However, markets were disappointed this week by a press conference from China’s top economic planning body, which failed to reveal specific policies that would be implemented to boost growth.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the wave of enthusiasm had begun to ebb away thanks to the lack of detail from Chinese authorities.

“Banks in China might be ready to lend, with lower rates and deposit requirements on offer, but if the demand isn’t there, it’s still set to hold back an economic rebound,” she said.

“Investors had been hoping for more details on an expected fiscal stimulus, hoping tax breaks would reinvigorate consumers and companies to borrow, but the vague plan put on the table yesterday by authorities disappointed.”

In the meantime, there continued to be consensus among portfolio managers running Asia-focused funds that more detail was still needed from the government to feel confident putting their money into the country.