Key takeaways
China’s economy continues to face fundamental challenges.
Consumer demand is weak, and the property market is hurting.
China’s spillover effects are negatively impacting emerging markets.
China appears to face continuing fundamental weakness on two major fronts. “The property market is still upside down,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management. “Also, if you look at core demand from a consumer standpoint, it’s just not there.” These are factors that may limit China’s growth in the near term.
After China’s consumer price index (CPI) declined 0.80% in January, prices rebounded, rising 0.70% in February, reflecting stronger consumer activity, primarily associated with Lunar New Year celebrations. Other economic indicators, such as improved trade activity, offer some favorable signs for China.1 However, its economy does not appear to be on a solid growth track. “China’s leadership still faces the challenge of how to rekindle the economy,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Sustained economic improvement may require a rebound in global trade and possibly some government stimulus measures.”
How do developments in China affect global markets today, and how should you assess investment opportunities based on China’s economic growth?
Export weakness and significant challenges in the property sector have played a major role in China’s overall slower economic growth. New home prices faced their steepest decline last year since early 2015.2 However, March data showed new home prices rising at their fastest pace in more than 30 months.3 Exports, an important linchpin for China’s economic growth, fell 4.6% in 2023, the first annual decline in export activity since 2016.4 Once again, more encouraging data emerged in early 2024, with China’s exports growing 7.1% over the first two months of the year compared to the same period in 2023.5 Despite recent weakness, China remains the largest global exporter of manufactured goods.6
Nevertheless, slowing domestic demand remains a challenge. “One reason China’s property weakness is a broader economic concern is that consumers have limited savings, having spent it down during the pandemic, and they have wealth tied up in housing, which has dropped in value. So they are not in a strong position,” says Haworth. “To the extent Chinese consumers are spending, demand is high for experiences, but not for goods.”
China’s stock market alone makes up more than one-quarter 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.
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.
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.
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.
Haworth also notes that while potentially taking a toll on China’s economy, tariffs imposed by the U.S. also hurt domestic consumers. “Tariffs reduce access to inexpensive goods coming out of China. U.S. consumers end up spending more on something they should have been able to obtain for less.”
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 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.7
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.
Source: World Bank national accounts data, January 2024.
*Projected growth in 2024 and 2025.8
Nevertheless, China’s status as the second largest economy in the world8 continues to position it as an important player on the global economic stage. With Chinese manufacturing back online, global supply chain issues have eased.
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 and again through the first three months of 2024.9
“As we look at the global market today, some investors may see a buying opportunity in emerging market stocks,” says Haworth. However, 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.”
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 stage a turnaround, investor confidence will need to stabilize.”
China’s stock market is showing modest improvement so far in 2024. “There’s not a great fundamental reason why we’ve seen the recent rebound beyond a ton of liquidity injections from China’s central government,” says Freedman. China’s economic trajectory may ultimately determine whether stocks can muster a sustained rally.
Investment risks in China include concerns about accurate financial reporting. “We no longer get real data from China’s government about unemployment or income growth,” says Haworth. Other risks include 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.
Economies across the globe have become increasingly interdependent. For example, many U.S. companies source products from China. During the height of the COVID-19 pandemic, this created supply chain constraints as portions of China’s economy were virtually shut down. That had a negative impact on business activity for some U.S. companies dependent on Chinese suppliers. An additional way events in China can affect the U.S. and other world markets is that China represents the second largest economy in the world and the largest emerging market in terms of stock valuation. If China experiences economic challenges or market volatility, it can have an impact on the global economy, which may be reflected in the U.S. stock market.
China has grown to have the second largest economy in the world, second only to that of the United States. Some forecasters predict that in the coming decades, China will grow to have the largest economy based on its Gross Domestic Product (GDP). China’s population is close to three times that of the United States, but the standard of living is much lower in China. One way this is measured is by GDP per capita – in other words, the size of the economy divided by the number of people residing in the country. In 2022, China’s per capita GDP was $12,720 compared to $76,330 for the U.S., based on World Bank national accounts data and OECD national accounts data.
When constructing a well-diversified portfolio to meet long-term financial objectives, international stocks can play an important role. “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 Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. China is the largest of the emerging markets. For a portion of a portfolio including China, Haworth 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.”
With inflation retreating and interest rate cuts likely coming later this year, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
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