Analysis: China’s economy and its influence on global markets

China remains a prominent force in the global economy and an indispensable market for investors with positions in overseas stocks. Those who recognize the importance of including international investments in a diversified portfolio also recognize that emerging markets – developing nations that are expanding their global economic profile – may offer attractive, long-term opportunities. Of all emerging market countries, China is by far the largest.

While China’s economy continues to expand, its growth rate is slower than many anticipated. The property sector, which fueled much of the country’s economic surge in recent years, is struggling, highlighted by four consecutive months of declining new home prices. At its peak, real estate represented approximately one-fourth of China’s economic activity.¹ Exports, an important linchpin for China’s economic growth, declined more than 6% in October 2023 compared to a year earlier.² In addition, the U.S. appears to want to reduce its dependence on imports from China. “We learned during the pandemic that we can’t rely on single sourcing anymore,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. China’s reliability as a source of goods was put in question when the country imposed harsh lockdowns as part of its zero COVID-19 policy.

Despite recent struggles, China’s stock market alone makes up close to one-third of the MSCI Emerging Markets Index. “Any investor who puts money to work in a broad, emerging market index likely owns a significant position in Chinese stocks,” says Haworth.

MSCI Emerging Markets Index Fact Sheet, October 31, 2023.

How do developments in China affect global markets today, and how should you assess investment opportunities in China’s growth?

China’s evolving population

China’s economic transformation from an agrarian-based society to the more urbanized and industrialized China of today is nothing short of astounding. The change began in the late 1970s, and since then, rapid growth has been a staple of China’s economic story. Until the last decade, China’s economy (as measured by Gross Domestic Product or GDP), often grew by more than 10% per year, resulting in vast expansion of the country’s middle class.

“Two key factors at play are the fact that China now has a well-developed middle-class, and it also faces demographic issues,” according to Haworth. China implemented a one-child limitation for families in 1980. The policy ended in 2016, but the result is an aging population and additional economic challenges that may result. This includes fewer working-age people to support the needs of its elderly population, and ultimately, a potential decline in the country’s overall population, which could hamper future economic growth. In 2023, India supplanted China as the world’s most populous nation, a distinction China held since global population statistics were first recorded by the United Nations in 1950.

Trade tensions

After a long period of reasonably open trade with the U.S., President Donald Trump in 2018 implemented new tariffs and other restrictions, most of which remain in force under President Joe Biden. “The more restrictions you have on trade, the more that friction gets built into economic growth expectations,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management.

A modest easing of what had been an increasingly tense U.S.-China relationship occurred in mid-November 2023, with a meeting between President Biden and China’s President Xi Jinping. “Perhaps we can’t expect anything major to change the current dynamic,” says Haworth. “The fact that they’re talking rather than arguing is somewhat productive.

Yet Haworth sees limited immediate benefits for China. “Rising global trade would help, but the data shows that’s not happening. There’s no sign that China plans to implement its own economic stimulus plan. Nor are there indications that the U.S. is prepared to walk back its tariffs.”

China’s economic reopening and growth trajectory

China’s economic recovery was slow to emerge since it eliminated its zero COVID policy in late 2022. China’s GDP growth came in below expectations in 2023’s first two quarters but grew at a rate of 4.9% in the third quarter.³ “We’re starting to see Chinese consumers follow the lead of U.S. consumers, and spend more on experiences such as travel,” says Haworth.

Hainlin notes that troubles in the real estate sector can take a toll. “China’s real estate market is almost viewed in the same way we in the U.S. look at our stock market. If China’s housing market is lagging, that can dampen consumer confidence about other forms of spending,” says Hainlin.

Based on the latest indicators, it appears China’s GDP growth rate may be on a slower trajectory than was the case for much of the past two decades.

Source: World Bank national accounts data; International Monetary Fund, “IMF Staff Completes 2023 Article IV Mission to the People’s Republic of China,” Nov. 7, 2023.
* Projected growth in 2023 and 2024.⁴

Nevertheless, China’s status as the second largest economy in the world (as measured by GDP) continues to position it as an important player on the global economic stage. With Chinese manufacturing back online, global supply chain issues have eased.

Source: International Monetary Fund, “World Economic Outlook, October 2023,” GDP, Current Prices.

Investing in international stocks

International stocks can contribute to a well-diversified portfolio, and Haworth the timing may be beneficial for U.S. investors. “One favorable factor is the improvement in investment fundamentals for many overseas markets.” Haworth says many emerging market stocks, including those based in China, are coming off low valuations. Emerging market stocks struggled significantly in 2022 and declined through the first nine months of 2023.⁵

“As we look at all of the risks in the market today, it makes sense to consider allocating a portion of equity assets into non-U.S. stocks, including emerging market stocks,” says Haworth. He favors emerging market funds that represent a broad index of stocks. “The emerging markets index provides significant exposure to Chinese stocks, since they make up close to one-third of the MSCI Emerging Market Index,” says Haworth. “But it also provides exposure to other markets that help diversify investors away from potential risks arising from investing exclusively in Chinese markets.”

Investment risks in China include concerns about accurate financial reporting, ongoing tensions between the U.S. and China, and the Chinese government’s potential for direct intervention that can affect specific companies or industries.

Any changes to your investment strategy should be consistent with your goals, time horizon and risk appetite. Talk with your U.S. Bank wealth professional to review your current financial plan and determine whether there is an opportunity to incorporate emerging market stocks – with exposure to China – into your broader, well-diversified portfolio.

Note: The MSCI Emerging Markets Index captures large and mid-cap equity performance across twenty-four emerging market countries. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments.