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IN THE EARLY 1950S, journalist Walter Winchell popularized the term “frienemies” when he used it to describe the fraying relationship between the United States and the Soviet Union. Today, we’re seeing a similar dynamic in our relationship with China. This makes it an important topic for investors.
Not long ago, the relationship between the U.S. and China was strong and mutually beneficial. Over the past 25 years, trade between the two countries has multiplied. At the same time, though, tensions have been growing. American companies operating in China have been complaining for years about intellectual property theft. According to a 2017 report by the non-partisan National Bureau of Asian Research, the cost to the U.S. economy of “counterfeit goods, pirated software, and theft of trade secrets” is at least $200 billion per year and potentially much more.
As a result, over the past several years, both the first and second Trump administrations as well as the Biden administration have imposed tariffs and other restrictions on China. That, in turn, has led to various forms of retaliation by Beijing, including a restriction on “rare earth” exports to the U.S. These minerals are critical inputs for the manufacture of semiconductors, batteries and other electronics.
While less overt, China has been taking other steps to undermine the United States. According to the U.S. government’s Cybersecurity and Infrastructure Security Agency (CISA), China’s government regularly perpetrates cyber attacks against the U.S. Targets include both our government and private companies.
China’s relationship with the U.S. is just one reason for concern. Of equal concern: Beijing’s domestic policies, which have negatively impacted investment markets. Of most concern is president Xi Jinping’s posture toward some of China’s largest publicly-traded companies.
Consider Xi’s punishment of Ant Group, a financial technology company founded by entrepreneur Jack Ma. By way of background, Ma was also the founder of Alibaba and is probably China’s most well-known business leader. But in November 2020, Xi’s government halted Ant’s planned initial public offering (IPO) days before it was scheduled to launch.
There was no official word, but observers believe the government’s action was in response to comments Ma had made in the months prior to the planned IPO. He’d criticized China’s banking system, characterizing it as a “pawn shop.” He also criticized government regulators. In the words of one China analyst, “he apparently crossed the invisible red line for what can be said and done in Xi Jinping’s China.”
Soon after, Ma was forced to give up voting control of Ant Group, and the company was fined nearly $1 billion. The government also punished Ma’s Alibaba with a $2.5 billion fine. Both actions were seen as arbitrary. Perhaps more disturbing was that Ma then disappeared from view for several months, raising questions about his wellbeing. He did later reappear, but it was an odd turn of events for someone who had at one point been China’s wealthiest person.
This wasn’t an isolated incident. Over the past five years, Beijing has targeted other powerful technology companies. Many have been fined or sanctioned and, as a result, seen their stocks drop. It levied other seemingly arbitrary fines against Alibaba and Tencent, two of the largest companies not only in China but in the entire emerging markets index. These actions were under the umbrella of a renewed “common prosperity” initiative. Ironically, the result was to erase $1 trillion of wealth from China’s stock market.
In 2024, the planned IPO of online retailer Shein was put on hold when regulators announced a “security review.” This was similar to the action Beijing took against Didi Global in 2021. Didi, which operates a ride-hailing app similar to Uber, had just completed its IPO when the government opened an investigation. The charges were vague, but in the end, it was forced to delist from the stock market, punishing both the company and its shareholders.
Despite the impact on investment markets, Xi’s government shows no sign of slowing its efforts to weaken powerful companies.
James Robinson is an economist who won the Nobel Prize in 2024 for work studying why some countries’ economies do better than others. In a presentation back in 2015, Robinson predicted precisely the problems we’re seeing in China today: “The impulse of the Communist party to suffocate anything that looks vaguely threatening to it politically is fundamentally inconsistent with…innovation.” That was eleven years ago. Recent experience confirms that Robinson was right—that China’s autocratic approach has indeed started to backfire, producing just the sorts of results he predicted.
Another problem in China is one that’s universal to all communist regimes: They believe the government is best suited to direct economic activity. This has manifested in a number of ways. Most notably, authorities have put too heavy of an emphasis on construction. That’s resulted in a surplus of housing units at a time when, due to the country’s one-child policy, the population has been falling. According to one study, there might now be as many as 90 million vacant homes that will never be sold. That, in turn, has resulted in significant bankruptcies among property developers. None of this has been good for investors.
For all these reasons, in recent years I’ve recommended that investors steer clear of investing in China. But since traditional emerging markets indexes typically include a sizable allocation to China, I’ve recommended an alternative: a fund called the Freedom 100 Emerging Markets ETF (ticker: FRDM). Unlike traditional market-weighted index funds, FRDM employs a “freedom-weighted” methodology. China—along with Russia before it went to zero—have never been included in FRDM’s index. And though it’s more expensive than a standard index fund, its higher costs have been more than offset by avoiding exposure to China. Since FRDM’s inception in 2019, it has delivered more than 15% per year. The MSCI Emerging Markets Index, which includes China as its largest weighting, has delivered annual returns of only 9% over that same period.
In the years after Walter Winchell first used the term “frienemies,” the U.S. saw its relationship with the Soviet Union deteriorate further. Whether or not that’s the way things go with China, it makes sense, in my view, to sidestep its investment markets. It just doesn’t seem to be worth the risk. Fortunately, investors now have another option: Vanguard recently introduced a new emerging markets ETF that specifically excludes China. The ticker is VEXC. It launched less than six months ago, but it’s a promising candidate to consider.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
Knowing what I have known and seeing what I have seen from my late banker, dad, who retired just before the take-over of Hong Kong. I saw first hand how he slowly & methodically moved his whole stocks portfolio into bonds and cash before the China take-over. Almost, if not all mega companies in China are state run and controlled. Perfect recent example of how this run, you can look no further back but during the COVID pandemic years.
An emerging market international fund or ETF with a small % in China is wise, because their government won’t allow them to fail, and will hold them up. Investors beware.
In fact, many of our family and friends had done the very same things before the take-over.
I missed his gold holdings as well besides cash. we didn’t have crypto back then.
Very easy to remember that new Vanguard fund. VEXC. Except China.
In my Vanguard taxable brokerage account I use a combination of Vanguard’s Developed Markets mutual fund and FRDM to avoid investing in China. But like many people I have a substantial amount of money invested in retirement accounts (in my case, with Fidelity), and the issue I am running into is that my 401(k) and 457B only offer a Total International fund for international investment options. So until I retire and can roll my 401(k) over into an IRA, I am either stuck with exposure to China or with investing only in US stocks, and neither of those options are prudent. It is very frustrating!
Excellent article, especially quote from Robinson
Thanks for the suggestion of FRDM.
in 2024, I sold the shares we had in a Chinese company that had been spun off from a US company in which we owned shares. I did not want to continue owning a Chinese company with a China-based business
Our current exposure to Chinese equities is limited to whatever may be included in the total international market fund in which we have shares.
Perhaps a more important lesson than whether we should invest in China, is how the current USA administration is behaving towards business (and speech in general) like Bejing. Replace “Trump’s America” for “Xi’s China” in this statement: “he apparently crossed the invisible red line for what can be said and done in Xi Jinping’s China.”
How can we continue to speak of intelligent investing when the system becomes arbitrary? One example: based on info in this blog, a few years ago we bought I Bonds through Treasury Direct, but the current government is likely to cook the inflation numbers used to index the bonds, and that’s just one of many assaults on the Fed.
Everything you say about China is accurate. The bigger problem for us is that it could apply to us here as well.
Mmm…I “love” political posts.
Biden had the highest inflation and the first time bonds lost so much in one year in the last 4 decades.
We are not interested in politics, just investing.
This comment
https://humbledollar.com/2026/01/china-market-risk/#comment-2086109
Is more succinct than mine.
With American policy chaotic at best now and full on retreat from Global norms and behavior including globalization, I posit the era of Americqn exceptionalism is over. International equities including China with their low PE multiples, even after 2025 exceptional performance, look very attractive.
China stock market did quite well last year. Early last year, I saw similar articles and general sentiment was avoid China. Lo and behold all the so-called experts and US sentiment was wrong, China had a great market return last year.
Good article. I’ve always avoided China. Difficult with some of my ETFs, etc. It may be [ as great as 0.5%] of my stock portfolio.
I am pretty averse to buying any ETFs that have a lot of Chinese exposure. But VEU strikes me as a good balance – only 7-8% in Chinese stocks with other emerging markets, but mostly in developed market stocks. I won’t invest in anything with a heavier weighting, but China feels like a good contrarian bet right now and I don’t want to be at 0. To be clear, VEU is only about 3% of my investable assets.
Jonathan liked the simplicity of investing in VT (Vanguard Total World). I agreed. However, I have a growing concern about the risks of investing in China, therefore I have been shifting away from VT into VTI (Vanguard Total US Stock ETF) for US exposure, and VEA (Vanguard FTSE Developed Market ETF) and FRDM for international exposure. I think Jack Bogle would have agreed with your analysis. Thank you.
Great article Adam. I have never invested in China in any form. To me, why invest in a Communist country where they can confiscate your property at any time? Besides, there is much fraud there.
Sort of sounds like… Trump Capitalism.
Good points, Adam. I have been avoiding investments in China by using the Vanguard Developed Markets ETF (VEA) which has outperformed their Total International ETF consistently. Once Vanguard introduced VEXC, I added some of that to gain Emerging Markets exposure without including China. Works for me.
Agree 100%.
Others to consider:
XCEM, Exp 0.16, Yield 3.25 TTM
EMXC, Exp 0.25, Yield 2.82 TTM
XC, Exp 0.32, Yield 1.68 TTM
Lowest cost:
VEXC, Exp 0.07, Yield 0.00 (at present)