Key takeaways

  • China’s economy continues to face fundamental challenges.

  • Recent government and central bank actions are designed to spur economic growth.

  • In 2024’s second half, Chinese stocks rallied, only to surrender gains in the fourth quarter.

The once high-flying Chinese economy continues to struggle with headwinds, stemming from an overbuilt property sector, ongoing consumer caution and global trade tensions. Between 2000 and 2019, China became one of the world’s fastest-growing economies. Average annual growth (as measured by Gross Domestic Product or GDP) exceeded 9%. Since 2020, average annual GDP growth dropped by nearly half, to 4.7%, approximately the same growth anticipated in 2024.1

Source: International Monetary Fund. *Projected growth in 2025.

“A major question is how does China overcome the economic hurdles currently facing it,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Investors are looking to see if China’s government can help stimulate more consumer spending, deal with the housing price overhang and excessive housing market debt.”

Earlier in the year, China’s government and central bank unveiled a series of stimulus measures designed to address those issues. “Despite these measures, markets are concerned that the government’s approach lacks specifics.”

 

Stocks rebound, then retreat

Markets initially reacted favorably to stimulus measures. The CSI 300 Index, a key measure of Chinese stock performance, reached its 2024 high in early October. At its peak, the index rose to a 24% year-to-date gain. However, investors ultimately indicated disappointment in the stimulus measures, and by late November, the index retreated and is now up 12.7% year-to-date.2

Chart depicts annual returns of the CSI 300 Index 2021-2024, which represents the largest stocks on China’s Shanghai stock exchange.
Reflects 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 November 22, 2024.

Despite its positive year-to-date return, by late November, the Index was 35% below its February 2021 peak.2

 

Escalating trade tensions

With former President Donald Trump elected to a new term that begins in January 2025, the door appears open to escalating trade tensions. Trump campaigned heavily on imposing new tariffs on goods America imports from overseas, with a primary emphasis on China.

“Along with its significant Chinese weighting, emerging market indices also provide exposure to other markets that help diversify investors away from potential risks arising from investing exclusively in China’s market.”

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

“We’re waiting to see specifics on what the new U.S. tariff levels on Chinese goods might be,” says Haworth. Another key factor, according to Haworth, is the extent China retaliates against U.S. trade restrictions. “Among the issues we’re watching is the degree to which growing trade tensions end up hurting Chinese and U.S. companies.”

 

China’s still dominant global role

Despite its recent challenges, China remains the world’s second largest economy (after the United States). However, the rapid growth that characterized recent decades has given way to much more muted GDP growth.1

Chart depicts gross domestic product (GDP) of the world’s largest economies.
Source: International Monetary Fund, “World Economic Outlook,” October 2024.

Notably, China’s per capita GDP (a basic measure of income per person) is far below that of most developed nations, indicating the country’s growth has a long way to go. China’s per capita GDP is $12,970, compared to the U.S. per capita GDP of $86,600.1

 

Investment market impact

China’s stock market alone makes up more than one-quarter of the MSCI Emerging Markets Index.3 “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, October 31, 2024.

Through November 22, 2024, global stocks generated year-to-date gains, but still lag U.S. markets.4 However, the MSCI Emerging Market Index’s 8.50% year-to-date total return is about double that of the MSCI EAFE Index, which measures developed market returns.3 This represents an improvement after emerging market stocks lagged performance of developed global markets in 2022 and 2023.

“You’ve seen good returns on a narrow set of emerging market economies, particularly those with a technology focus such as Taiwan and Korea,” says Haworth. “Yet other components like financial stocks make up the largest weighting in the emerging markets index, and those stocks have lagged this year.”

 

Investing in international stocks

International stocks can contribute to a well-diversified portfolio. “We believe global stocks represent a reasonable opportunity, as they offer more attractive valuations than U.S. stocks,” says Haworth.

Haworth says an emerging market index may be an effective way to incorporate into your portfolio a position in China’s market. “Along with its significant Chinese weighting, emerging market indices also provide exposure to other markets that help diversify investors away from potential risks arising from investing exclusively in China’s market.”

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. Based on data from the International Monetary Fund.

  2. finance.yahoo.com. As of Sep. 30, 2024.

  3. MSCI Inc.

  4. S&P Dow Jones Indices; MSCI Inc.

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