Analysts also believe the environment for tech companies is improving. Investor sentiment soured as Xi announced regulatory crackdowns in mid-2021. But there are signs of a more tolerant attitude: China this week allowed the ride-hailing company Didi to resume signing up new customers, for example.
Mark Preskett of Morningstar Investment Management says many of the pressures that caused the sell-off in Chinese shares were easing and China “now makes up a key position” in Morningstar’s multi-asset portfolios. Goldman Sachs, the bank, has forecast that in 12 years’ time China’s economy will be larger than America’s.
Yet the cost of Xi’s draconian measures was made clear this week when official figures reported economic growth of just 3pc last year, the weakest figure, apart from 2020, since 1976. But McDermott says he was not put off.
“Economic growth has slowed but is still stronger than in the West, inflation is lower, geopolitical tensions for now seem to have peaked and the stock market, as well as being cheap, is home to a plethora of opportunities.”
Reasons for caution remain. Since Covid restrictions were lifted last month the death toll has hit 60,000. Elizabeth Kwik, co-manager of the Abrdn China investment trust, says further lockdowns in the country could not be ruled out.
“As cases continue to mount, the strain on the healthcare sector is becoming more visible,” she says. “While the government is working to broaden access to Covid treatment and is pushing to vaccinate more people, it is likely that the authorities may consider targeted restrictions. That could dent near-term sentiment in the market.”
Oliver Jones of the investment firm Rathbones says China still has key structural problems.
“Its property sector is still in its deepest downturn in decades, struggling to recover from years of overbuilding despite policymakers’ attempts to shore it up,” he says. “Demographics are turning into a headwind too, with the country’s population shrinking for the first time in six decades last year and projected to keep falling.”
Also, although some investors believe China’s tech crackdown may be cooling off, the Government still has a firm grip on its tech giants. It is increasingly taking small stakes in companies such as Alibaba, the internet giant. But these risks are why China’s stock market valuations are among the most attractive in the world, according to Preskett.
“For example, we see Tencent and Alibaba, which together make up more than 20pc of the Chinese index, both trading at around 50pc discounts to fair value.”
To manage risk, most investors who want exposure to China should consider emerging market funds such as Fidelity Asia, Aubrey Global Emerging Markets Opportunities and Guinness Asian Equity Income. For those who want more exposure, McDermott recommends Invesco China Equity; for those who want to steer clear, Jupiter Asian Income.