Is China investible?

Unique Advantages and the Shifting Dynamics of Competition

Introduction

One question I get asked all the time is, “Is China investable?” It’s a topic that ignites passionate debates, backed by both solid reasoning and some misconceptions. But here’s the thing: framing the question so broadly oversimplifies a complex issue. Assessing whether China is investable isn’t a simple “yes” or “no” proposition; it’s as individualized as deciding whether taking a vitamin D supplement is right for you. The answer depends entirely on your specific circumstances, risk tolerance, and personal insights—just like any investment decision involving Chinese stocks.

What is your Edge?

Investing is ultimately about having an edge—an advantage that sets you apart from others in the market. It’s just like playing in a casino: you should only sit at the table if you have an edge; otherwise, the house always wins in the long run. Without a distinct advantage, investing becomes a gamble where the odds are stacked against you. This edge could come from sharper analytical skills, a longer investment horizon, a higher tolerance for volatility, access to exclusive information, or specialized industry expertise. While these advantages are valuable in any market, when it comes to China, there’s a unique edge available that isn’t typically found elsewhere.

A Unique Edge in the Chinese Market

China’s restrictions on capital flows have resulted in many of its best companies being listed as ADRs or on the Hong Kong Stock Exchange, markets that has been largely inaccessible to mainland Chinese investors. Take Alibaba, for example: it generates most of its revenue and profits within mainland China, yet domestic investors couldn’t easily invest in its shares for a long time.

This means that the primary users of these services can’t invest in the companies, while many shareholders—often foreign investors—don’t experience the products or services firsthand. Additionally, foreign investors typically rely on Western media for information about Chinese companies, which can sometimes be skewed or lack nuance. If that’s not a recipe for market inefficiency, I don’t know what is.

Imagine if the roles were reversed: Amazon is listed only on China’s A-share market, accessible exclusively to mainland Chinese investors who rely solely on Chinese media for information. Do you think they’d assign the same valuation to Amazon as U.S. investors do? Probably not.

Being in China and experiencing the market dynamics firsthand gives you a significant advantage. If you can’t be here yourself, finding reliable sources on the ground who can provide these insights is crucial.

Let me give you some real-world examples to highlight the value of experiencing China firsthand.

Starbucks SBUX 0.00%↑

Take Starbucks, for example. The company is struggling in China, and for anyone living here, this is no surprise. Chinese coffee chains are emerging everywhere, and bubble tea brands like Heytea are booming, thanks to highly effective local marketing. But that you can read in every filing.

The real difference, however, lies in the business model. Starbucks operates in China the same way it does in the U.S., with large stores offering seating, free Wi-Fi, and cozy decor, essentially becoming a co-working space. Customers stay for hours, enjoying air conditioning in summer and heating in winter. But local competitors like Luckin Coffee have mostly eliminated seating and rely on low-cost delivery through Meituan and Ele.me. While this approach would be too costly elsewhere due to high delivery fees, in China, it works well and makes this model much cheaper. When you walk into a Luckin store, you rarely see customers—just a wave of Meituan couriers picking up orders.

This leaner model enables Chinese chains to offer coffee at much lower prices than Starbucks, which still charges high prices for takeout orders or through their seating-free Starbucks Now model. In lower-tier cities, where disposable income is limited, it’s hard to justify paying 40 RMB for coffee. Without adapting its approach, Starbucks is likely to struggle in these markets, regardless of how popular coffee becomes.

Let’s be honest: Starbucks certainly doesn’t stand out for its superior taste.

German Carmakers

For full disclosure, I was born less than 50 kilometers from Porsche’s headquarters, and I’ve always loved German cars. In terms of internal combustion engines, they’re the best. But German electric cars? Meh. Recently, headlines announced a 40% drop in Volkswagen’s earnings, highlighting struggles that have been apparent for years, especially in China.

When I first came to China, the parking lots looked like German car showrooms: BMWs, Mercedes-Benzes, Audis, and Porsches everywhere, alongside the occasional Toyota/Lexus and a few ultra-luxury cars. I used to joke with my family that this was how Germany made money. Now, though, those parking lots tell a different story. Sure, there are still German cars, but they’re mixed in with Chinese brands like NIO, Li Auto, BYD, and Xiaomi, plus a few Teslas. The shift is obvious.

So, what changed? Around 2016, I used to ask Chinese friends why they spent so much on German cars, especially with traffic jams in cities like Beijing. Back then, this was almost offensive to them, as if questioning their taste or spending power. But today, opinions have shifted. I recently had dinner with a friend in Shanghai who swapped his Audi Q7L for a Xiaopeng, telling me, “Why pay double for a car with inferior software?” He’s right—Volkswagen’s software troubles have forced it to buy a stake in Xiaopeng after burning billions trying to develop software in-house.

The dynamics have reversed. In the past, German companies were “forced” to enter joint ventures with Chinese firms for market access. Now, they’re investing in Chinese companies to access their software expertise. This shift is reflected beyond cars, too. Luxury brands like Louis Vuitton and Gucci are seeing dwindling interest, and even in makeup, Chinese brands are now the top choice. If you’re betting on growth, Chinese companies are the ones to watch in these spaces.

The Relentless Competition in China

But I digress—let’s return to the beginning of the article and focus on a crucial yet often overlooked reason why China might not be investable. A key factor that foreign investors frequently miss is the sheer intensity of competition in China. It’s not just fierce; it’s relentless. Successful business models are copied almost instantly, whether they involve a new retail concept or a tech innovation. As a result, only a few companies manage to achieve sustained success. Investing is harder as the percentage of successful companies is much smaller than elsewhere. But those companies that emerge as survivors are fierce competitors.

In the U.S., tech giants often dominate their respective niches with little direct competition—think Amazon in e-commerce, Google in search, Microsoft in software, and Meta in social media. In China, however, multiple players are battling it out in every sector. E-commerce isn’t just Alibaba; it’s also JD.com, Pinduoduo, and even newcomers like ByteDance and Kuaishou entering the fray through social commerce. Even in search, where Google dominates over 90% in the U.S., Baidu’s market share of 60% in China is constantly under threat from Tencent and others.

Shifting competitive dynamics

Interestingly, competitive dynamics in both countries are shifting. In the U.S., where companies once maintained defined areas of expertise, tech giants are all converging on AI, creating a new battleground that promises fierce competition. Meanwhile, in China, formerly walled ecosystems like those of Alibaba and Tencent are beginning to integrate. Recently, users gained the ability to use WeChat Pay on Taobao and Alipay on JD.com, breaking down old barriers and easing competition within China.

I think this is an important shift to observe.

Years of cutthroat competition suddenly give way to industrial statesmanship.

From 100 to 1 in the stock market by William Phelps

Now, with the slowdown in domestic consumption, Chinese companies are increasingly going abroad, taking their battle-hardened strategies with them just as competition in the U.S. tech space heats up. Pinduoduo, for example, has shaken up international markets with its aggressive low-price model, challenging giants like Amazon, which has had to launch similar budget offerings in response. The same intense rivalry that Alibaba faced domestically from Pinduoduo is now playing out in global markets. As Chinese companies shift focus overseas, competition intensifies on the international stage just as it cools slightly within China.

Bringing It All Together

It might sound like I’m saying most people have no business investing in China, but that’s not my intention. If you look at the situation with open eyes and don’t dismiss all Chinese stocks outright, you’re already ahead. Consider visiting occasionally, or at least exchanging insights with people on the ground, reading local newspapers, or considering perspectives from within China. By doing this, you’re already far ahead of most. Remember, for ADRs and H-shares, your main competitors are foreigners. Investing in Chinese A-shares, though, is a completely different game.

As always, the key is to find your edge and use it wisely. You only play if the odds are in your favor.