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When it rains, it pours (Especially true for China equities)

Yet another horrendous week for China equities.


I thought of writing a post on this just to document how beaten the China equities are in recent years.


Between 1995 and 2015, the Nikkei index had almost no growth and we see almost two lost decades for any investors who invested in the Japan market during this period.


While it hasn't exactly been two decades since the never-ending drop of the China equities, the odds of the China market having their own lost decade is becoming higher and higher. The economic situation in China is becoming increasingly worrying. In terms of stock performances, we are now looking at almost three years of continuous drop.


Let's take MCHI (iShares MSCI China ETF) as an example.


Here are the annual returns of the ETF since 2012.



Look at the results of 2021 and 2022. Both years provided a loss of more than 20%.


If you think this wasn't bad enough, below is the YTD return for MCHI.



Another double digit decline in 2023 so far. And this could get even uglier in the remaining 4 months of 2023. I don't think anyone dares to bet against yet another 20% loss.


For someone who has invested in this ETF during Dec 2020, he or she is now looking at having his money halved after investing for 32 months.


And if you look at the past drawdowns, the sign isn't exactly encouraging.



We are now looking at the worst drawdown of the ETF since 2012, and obviously it doesn't seem like the tide is going to change anytime soon. If we crash below Oct 2022 (which is honestly not too far from where we are now), this drawdown is going to be worse than what is reflected above.


Anyone who is regularly reading the news now can tell that the state of the economy in China has been very worrying. The real estate crisis is getting full blown with the Evergrande filing for bankruptcy this month. Just last week, we are also talking about Country Gardens defaulting their payments. Everyone knows how intricately linked the real estate market in China is linked to the overall economy. In fact, it's probably a lot more intertwined than what we see in any other developed markets in the world. The collapse of the real estate market will put the China economy into shambles.


Not to forget, this is not the only problem the China market has. We are also talking about high youth unemployment, the ongoing trade war between the U.S and China which cripples the technology companies in China, long term economy effects from a prolonged lockdown period in China, and the constant tightening of regulations on China technology companies by their government (though this has start to turn for the better in the recent months).


Honestly, any of these factors could have destroyed any country. Even for a country with so much potential like China, the combination of the above factors might just be too large for them to bear. Interest rates have been cut, regulations on technology have been loosened, and economic stimulus has been made. Yet, the whole China economy is still sluggish at best.


Honestly, it's going to be really tough to see how China can walk out of this situation in the near future. I am really not hopeful about the China market, and will certainly not look at adding any more to my current positions in MCHI and BABA in my portfolio.


For the first time next Jan (when I do my annual rebalancing), I am likely going to not rebalance my positions in China equities and continue with the reduced stakes they have in my portfolio.


I have seen many financial YouTubers and bloggers who advocate contrarian investing and continue to bet on the big return in the China market, and just couldn't agree with them.


Interested to know what others think? Join my Telegram channel where I just published a recent poll on the handling of China equities in one's portfolio.

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