Are China shares able to roar? asks ANNE ASHWORTH

At first sight China seems an unappealing investment proposition. A host of problems besets the world’s second-largest economy, including US President Donald Trump’s punitive tariffs, a disinclination to spend among its 1.4billion population and a sharply declining birth rate.

By 2030, there are predicted to be more pets in China than toddlers.

But investors keen to diversify may still be interested in a nation that gave the world TikTok – and is now responsible for the most talked-about technological innovation of recent months.

This is DeepSeek, the bargain-priced artificial intelligence (AI) model, created in Hangzhou in the province of Zhejiang. The system is a rival for the much more costly American ChatGPT.

DeepSeek’s arrival rocked Wall Street last year, since it called into question America’s lead in the AI revolution. US broker JP Morgan argues DeepSeek’s low cost should enable Chinese companies to experiment with AI to improve customer engagement and sales.

The DeepSeek factor was one reason for the 22 per cent rise in the MSCI China index last year. Since January, it has advanced by a further 12 per cent.

This suggests that, while attention was focused on US tech stocks, some investors were seeking to make the most of China’s lead in fields such as battery tech, drones, robotics – and electric vehicles (EV).

Shenzen-based BYD has overtaken Tesla as the world’s number one EV maker. The shares have leapt by 32 per cent this year, driven by claims it can fully charge a car in five minutes.

The jump in the MSCI index also reflects the double-digit rises of its three largest constituents: Tencent, which operates the We Chat app but also develops video games such as League of Legends; tech titan Alibaba; and food delivery platform Meituan, which serves 60m orders a day.

The share price rises suggest a level of optimism, despite a debt-laden property market, which has dented the nation’s low consumer confidence.

Since the end of the pandemic, the Chinese have been reluctant to splash out – a blow for European luxury goods groups such as LVMH, and which could also mean deflation in China, aggravating property sector woes after the high-profile failures of construction companies.

Geopolitical tensions are also a threat, as Premier Li Qiang, the third most powerful official in the government, warned this month: ‘Changes unseen in a century are unfolding across the world at a faster pace.’

He promised more stimulus to shield manufacturers from tariffs, plus solutions to the housing slump but made it clear that boosting consumption, through such steps as creating more jobs, was the top priority. The budget for the consumer goods trade-in programme, where households are subsidised for trading in household goods and second-hand cars for new ones, is to be raised. Good news for BYD and other EV players including Nio and Xpeng.

Peiqian Liu, Asia economist at Fidelity International, says Qiang implied more would be done to counteract Trump’s policies, saying: ‘Almost five decades ago, China’s former leader Deng Xiaoping would often say that the country was ‘crossing the river by feeling for the stones’.

‘That cautious approach helped turn China into an economic powerhouse. This time, arguably, the water is deeper and more turbulent. Policy-makers are treading more carefully.’

Investors should also be treading carefully. But if you want to explore, here are the options.

HOW TO INVEST

Venturing into China will be hazardous since history is not necessarily a guide to how China will fare in this trade war.

It may have weathered the tariffs imposed under the first Trump presidency, and exports to the US may be just 13 per cent of total overseas trade, but this may still not necessarily minimise volatility. It is possible to buy shares in US and Hong Kong-quoted Chinese companies through investor platforms including Interactive Investor.

Alibaba, BYD and Tencent are among the groups quoted in Hong Kong. There are ways to invest in Shenzhen or Shanghai-quoted companies, but the most practical route is through a fund or trust.

You can choose an index tracker like the HSBC China exchange traded fund (ETF) which tracks the MSCI China index.

But if you want something more adventurous, Darius McDermott, managing director of Fund Calibre, says it is essential to find a fund manager who is a skilled stockpicker. He cites the FSSA All China fund, which has stakes in Tencent, Meituan and China Mengniu, a dairy products group.

Fidelity China Special Situations is another possibility. This trust’s holdings include Tencent and Pony.ai, a leader in autonomous vehicles. The company, which runs driverless taxis in the cities of Beijing, Shanghai, Guangzhou, and Shenzhen, floated on the US Nasdaq exchange last November to gain global recognition.

Byte Dance, the unquoted group that owns TikTok, is another trust investment.

Investors worldwide would like to get a slice of the DeepSeek action. Within weeks of its launch, the app was the most downloaded on the Apple Store.

But founder Liang Wenfeng does not want outside investment. The hedge fund entrepreneur may be finding his national hero status enough to cope with.

HOW TO SPREAD YOUR RISK

If you want to lessen the gamble, but are keen on wider exposure to Asia, you could consider Temit – the Templeton Emerging Markets Investment Trust. It holds Alibaba and Tencent, but also the South Korean firm Samsung Electronics.

Its largest stake is Taiwan Semiconductor Manufacturing Company (TSMC), which makes the microchips powering ChatGPT.

Note, however, that it is also in the crosshairs of the tensions between China and Taiwan.

The JP Morgan Emerging Markets trust also holds TSMC and Tencent but, by way of counterbalance, it also own Mercado Libre – which is Argentina’s answer to Amazon.

McDermott suggests Baillie Gifford Pacific, where China is about a third of the portfolio. Other holdings include Mediatek, a less famous Taiwan microchip firm.

If you are concerned about China’s form of government and reports about the oppression of the Uyghurs – the country’s Muslim minority – you should probably look for other ways to diversify your portfolio.

There is no way to establish that a Chinese company takes a principled stand on these issues.

Sustainability is rising up the corporate agenda, but critics argue that this drive is more about achieving world dominance in battery technology, electric cars and solar panels rather than saving the planet.

These issues will come to the fore when Chinese fast fashion giant Shein aims to make its stock market debut in London this year.