Key takeaways

  • Modest growth and declining prices cast a shadow of uncertainty over China’s economic trajectory.

  • This uncertainty is reflected in China’s stock market, which produced negative returns the last three years.

  • Investors wonder if these difficulties facing the world’s second largest economy might spill over impacting global capital markets.

China’s economy continues to face headwinds that were not encountered during a period of rapid growth in the late 20th century and first part of the 21st century. China’s economy grew by 5.2% in 2023. While that would be considered impressive growth for a developed economy, it represents only modest expansion based on recent decades of much more rapid growth for China, which is still classified as an emerging market economy.

China’s consumer price index (CPI) declined 0.80% in January. China’s inflation rate had been relatively flat until turning deflationary in recent months.1 “Many Chinese companies are dealing with excess inventories, partly due to slower global trading activity,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “It isn’t likely to turn into a deflationary spiral, but it may require a rebound in global trade and possibly some government stimulus measures.”

Export weakness and significant challenges in the property sector have played a major role in China’s overall slower economic growth. Many aspects of the property market struggled, including new home prices, which in 2023 experienced their steepest decline since early 2015.2 Exports, an important linchpin for China’s economic growth, fell 4.6% in 2023, the first annual decline in export activity since 2016.3 In addition, slowing domestic demand remains a challenge.

“Chinese consumers have reduced spending on goods, putting more money toward leisure and hospitality,” says Haworth. “And it doesn’t appear that global trade activity is likely to improve significantly in 2024.”

China’s stock market alone makes up more than one-quarter of the MSCI Emerging Markets Index, though its share of all equity value in emerging markets slipped in 2023. “Any investor who puts money to work in a broad, emerging market index likely owns a significant position in Chinese stocks,” says Haworth.

Pie chart depicts what percentage of the MSCI Emerging Market Index is attributable to China, Taiwan, India, South Korea, Brazil and other countries.
MSCI Emerging Markets Index Fact Sheet, January 31, 2024.

Investors with positions in overseas stocks may look for opportunities to put money to work in China, the world’s second-largest economy (behind the U.S.). China is still classified as an emerging market, but its equity values represent, by far, the largest among all emerging market countries.

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 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 often grew by more than 10% per year, resulting in an expansion of the country’s middle class.

“Any investor who puts money to work in a broad, emerging market index likely owns a significant position in Chinese stocks.”

Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management

“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. It has an aging population, causing some of its economic challenges. 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. For the first time in history, India in 2023 supplanted China as the world’s most populous nation.

 

A cooling of U.S.-China relations

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.

Additional tensions exist in relation to China’s claims over Taiwan. The issue arises frequently, but Haworth notes that it has persisted for decades. “Taiwan continues to assert its independent status, and while there is some wariness about China’s ultimate intentions in relation to Taiwan, it hasn’t yet created any direct economic concerns,” says Haworth.

 

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 growth of 5.2% in 2023 exceeded the previous year’s 3.0%, but is still considered lagging by historical standards.4

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 may be on a slower growth trajectory than was the case for much of the last two decades.

chart depicts annual gross domestic product, or GDP, of the Chinese economy 2000-2023.

Source: World Bank national accounts data, December 14, 2024.
*Projected growth in 2024.5

Nevertheless, China’s status as the second largest economy in the world5 continues to position it as an important player on the global economic stage. With Chinese manufacturing back online, global supply chain issues have eased.

 

Investing in international stocks

International stocks can contribute to a well-diversified portfolio, and, says Haworth, “emerging market stocks can be part of that mix.” Emerging market stocks struggled significantly in 2022 and lagged performance of developed global markets in 2023.6

“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 about one-quarter 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.” Haworth notes that in the current environment, markets such as Brazil, Mexico and India are showing more favorable economic growth. “Not all emerging markets are positioned to perform equally, and in the current environment, China’s market may face more struggles than others represented in that index,” says Haworth.

China’s equity market declined in three consecutive years between 2021 and 2023. “Earnings weakness and investor skepticism about future earnings have put pressure on Chinese stocks,” says Haworth. “For China’s stock market to begin a turnaround, investor confidence will need to stabilize.”

Chart depicts the performance of the Chinese stock market 2021 - February 22, 2024.
Represents price return on CSI 300 Index, which represents the 300 largest stocks on Shanghai’s stock exchange. No taxes or fees are assumed. *As of February 22, 2024.

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.

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Disclosures

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  1. Myers, Joe, “Chinese consumer prices fall and other economics stories to read this week,” World Economic Forum, Feb. 9, 2024.

  2. Gao, Liangping and Woo, Ryan, “China’s property market slide worsens despite government support,” Reuters.com, Jan. 16, 2024.

  3. Cheng, Evelyn, “China’s annual exports drop for the first time in seven years,” CNBC.com, Jan. 12, 2024.

  4. Cheng, Evelyn, “China’s misses fourth-quarter GDP estimates, resumes posting youth unemployment data,” CNBC.com, Jan. 16, 2024.

  5. World Bank, “Which Way Forward? Navigating China’s Post-Pandemic Growth Path,” Dec. 14, 2023.

  6. S&P Dow Jones Indices; MSCI Inc. Total returns for one-year period were 26.29% (S&P 500), 18.24% (MSCI EAFE), 9.83% (MSCI Emerging Markets Index).

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