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

China remains a major force in the global economy, even though growth has slowed from the rapid pace of the 2000s. China’s economy expanded 4.3% in the second quarter of 2026 from a year earlier, down from 5.0% in the first quarter and the slowest pace since late 2022. ¹ China still ranks as the world’s second-largest economy after the United States at current market exchange rates and the largest when measured by purchasing power parity, which adjusts for differences in local prices. ²

Economic scale gives China broad influence across trade, manufacturing, commodities and corporate profits. Changes in Chinese demand affect companies that sell machinery, consumer products and raw materials into the country, while changes in Chinese supply affect prices and competition in markets around the world. Investors therefore gain more from tracking the composition of China’s growth than from labeling one quarter as simply strong or weak.

China’s current growth mix relies heavily on exports and industrial production while property investment and household demand remain subdued. This imbalance supports factory activity but leaves the economy sensitive to trade restrictions and weaker demand from overseas customers. It also explains why solid export figures can coexist with cautious consumers and low inflation at home.

U.S.-China trade policy is redirecting global supply chains

U.S.-China trade policy continues to shape business investment and supply-chain decisions. The Trump administration’s tariffs and restrictions on advanced technology have raised the cost of some trade between the two countries and encouraged companies to diversify production and sourcing. Negotiations can reduce near-term uncertainty, but companies still plan around a more competitive and less predictable relationship.

China built much of its modern economic rise on low-cost manufacturing, infrastructure investment and a growing skilled workforce. Those strengths expanded China’s export capacity and lifted household incomes, but they also increased the economy’s exposure to changes in foreign demand and market access. China now competes more aggressively in advanced industries, including electric vehicles, batteries, renewable-energy equipment, semiconductors and industrial automation.

Large economies adjust gradually because factories, energy systems, transportation networks and worker skills take years to change. Companies can shift final assembly to another country more quickly than they can replace China’s full supplier network, port capacity and manufacturing expertise. The result is not a clean break from China, but a more complex system in which businesses add suppliers and production sites across Asia and other regions.

China exports are expanding beyond the U.S.

China is offsetting softer U.S. demand by selling more goods to Asia, Europe and other markets. Total exports increased 23.9% in July 2026 from a year earlier, supported by demand for electronics, artificial-intelligence infrastructure components, electric vehicles and industrial equipment. Shipments to the U.S. also increased in July, but tariffs and policy uncertainty continue to encourage exporters to develop other customers. ¹

“China replaced some U.S. business with increasing exports to other countries,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. The shift broadens China’s customer base while increasing competition for manufacturers in other export-oriented economies. It can also create trade friction when low-priced Chinese goods pressure local producers or prompt governments to impose new restrictions.

For investors, the export shift changes where China’s economic influence appears. Stronger trade with Asian economies can support shipping, suppliers and manufacturers tied to regional production networks, while greater Chinese competition can pressure profit margins in exposed industries. Company results will depend on each business’s role as a supplier to China, a customer of Chinese producers or a direct competitor.

China’s property slowdown restrains consumer spending

China’s property downturn began in 2021 and continues to weigh on economic growth and household confidence. ¹ In July, new home prices declined 3.4% from a year earlier while existing home prices fell 5.4%, extending the erosion in household wealth. Because families have traditionally held a large share of their savings in housing, falling property values can lead them to save more and spend less.

China’s property sector accounted for nearly one-third of the country’s earlier economic growth. ³ A prolonged adjustment therefore affects construction jobs, local-government finances, demand for building materials and purchases linked to new homes. The transition also limits the effectiveness of policies designed to stimulate spending if households remain focused on rebuilding savings.

Retail sales grew 2.7% in the second quarter of 2026 compared with a year earlier, improving from 2.4% in the first quarter but remaining well below the 11% average growth rate since 2000. ¹ “Stimulus measures are boosting consumer spending, but households are also saving more,” Haworth says. “The economy continues to grow, although it isn’t accelerating.”

China economic data shows slower momentum

Low inflation and low government bond yields reinforce the picture of modest domestic demand. Consumer prices rose 0.5% in July from a year earlier, while China’s 10-year government bond yielded 1.68% as of September 1, 2026. ¹ Low yields reduce borrowing costs, but they can also reflect restrained inflation expectations and investor demand for safer assets.

Several indicators point to weakness beyond consumer spending and housing. China’s crude oil imports fell 24.3% in July from a year earlier as disruptions to Middle Eastern supply compounded softer economic activity. ¹ Exports and industrial production continued to support growth, but the decline in oil imports, falling home prices and modest retail sales show that domestic momentum remains uneven.

Gaps and methodology changes in some publicly available data make this cross-check especially important. Youth unemployment provides one example of a series whose reporting has changed, complicating comparisons over time. A broad set of indicators helps investors distinguish a temporary slowdown from a deeper change in China’s growth model.

China stock market performance remains volatile

The China stock market has delivered uneven returns throughout the 2020s. The MSCI China Index declined in 2021, 2022 and 2023 before rebounding in 2024 and 2025. A weaker U.S. dollar supported dollar-based returns because gains translated into more dollars for U.S. investors. ¹

Chinese stocks came under renewed pressure in 2026 as geopolitical conflict disrupted energy markets and highlighted China’s dependence on imported oil. As of September 1, the MSCI China Index had returned -8.5% for the year and remained more than 30% below its February 2021 peak. ¹ That record illustrates how policy, property conditions, trade and energy security can produce large swings even when the economy continues to expand.

China’s stock market footprint remains modest relative to its economic influence. Chinese stocks account for about 2.5% of global stock market value, compared with 63.6% for U.S. stocks. ⁴ This gap reflects the dominant size of the U.S. equity market and leaves China with less influence on broad global stock indexes than its economic scale might suggest.

Emerging market stocks now extend well beyond China

“An investor who uses a broad emerging market index generally owns a meaningful allocation to Chinese stocks,” Haworth says. The size of that position varies across funds as market values change and index providers update their benchmarks. Investors should review current holdings because emerging market funds can differ significantly in their country, sector and currency exposures.

Emerging markets have recently delivered stronger performance relative to developed international markets. In 2024, the MSCI Emerging Markets Index returned 7.5% including dividends, nearly double the return of the MSCI EAFE developed markets index over the same period. Emerging markets still trailed U.S. stocks that year, as the S&P 500 gained 25.0%. ¹

The emerging market opportunity set has broadened as Taiwan and South Korea benefit from semiconductor and artificial-intelligence demand, India expands its domestic economy, and Brazil adds exposure to commodities and financial companies. These markets respond to different economic and policy forces, which can reduce reliance on a single country. Diversification does not prevent losses, but it spreads the sources of return and risk.

Performance broadened further in 2025 and into early 2026. Emerging market stocks returned 33.6% in 2025, compared with 17.9% for the S&P 500. Through September 1, 2026, emerging markets had gained 25.2%, compared with 12% for the S&P 500. ¹

How diversified international stocks can provide China exposure

International stocks can broaden an investment portfolio because markets outside the United States do not always move in the same direction or at the same pace as U.S. stocks. “Global stocks offer an attractive way to diversify from elevated U.S. equity values and trade uncertainty,” Haworth says. This approach emphasizes exposure across economies, currencies and business cycles rather than a short-term forecast for one country.

Haworth favors gaining China exposure through broad emerging market funds instead of concentrating on a narrow segment of the China stock market. A diversified fund can include China while also holding companies in Taiwan, South Korea, India, Brazil and other economies. This structure reduces dependence on one country’s policy decisions, property cycle or currency, although emerging markets still carry higher political, regulatory and market risks than developed markets.

“Emerging market economies now include more manufacturing and technology exporters than they did in the past,” Haworth says. “Some manufacturers outside of China may also gain business as companies adjust supply chains in response to U.S.-China trade tensions.” Investors can use this broader opportunity set to complement U.S. holdings, then work with a U.S. Bank wealth professional to confirm whether emerging market stocks, including China exposure, align with their goals, time horizon and tolerance for risk.

How China’s economy is structured and measured

China’s economy is officially described as a “socialist market economy.” While China has added more free-market elements in recent decades, the central government still retains control over large parts of China’s economy. There are many state-owned enterprises, and China is also home to a vibrant private sector that has grown rapidly in recent decades. Most of China’s economic growth and employment stems from private-sector activity. In past decades, China’s economy, as measured by Gross Domestic Product (GDP), frequently grew by 10% or more per year. While still enjoying robust growth, GDP expansion has slowed, most recently to the 5% range. 

China’s role in global and Asian markets

China has significant influence in Asian markets as it is the largest Asian economy and is considered an anchor in the region. China, Taiwan and India are among the most prominent emerging market countries in the world. From a global perspective, China’s economy is the second largest after the United States, accounting for nearly one-fifth of the global economy.

Why China matters to global market activity

China’s market influence has expanded rapidly in recent decades, drawing significant investor attention. Some global conglomerates are increasingly focused on generating business from Chinese consumers and businesses, creating a direct link between China’s economic health and corporate earnings for international companies. From an equity market perspective, China accounts for nearly one-quarter of the MSCI Emerging Market Index’s market capitalization. China is responsible for roughly one-third of global manufactured goods and, as a heavy user of industrial metals, often helps shape pricing in that market.

What drives changes in China’s economic growth

While China’s economic growth in recent decades is considered impressive, its strengths vary. For years, China’s government invested significant capital in housing, roads and rail, fueling rapid GDP growth. Now the country is focused more on high-tech manufacturing, including electric vehicles, solar energy materials and lithium-ion batteries. A detrimental factor is that China’s property sector was significantly overbuilt, resulting in substantial vacant space. China continues to be highly dependent on export activity, with domestic consumer activity playing a lesser role in economic expansion.

How to interpret changes in China’s economic influence over time

China’s economy is evolving over time. As its economic power expanded beginning in the 1980s, China’s growth was driven by assembling consumer goods, including electronics, at very low prices and shipping large volumes abroad. This new avenue of low-cost industrial production helped fuel a period of low global inflation. More recently, low-cost production has shifted to other countries, and China’s exports are increasingly focused on advanced sectors, such as electric vehicles, advanced telecommunications and solar infrastructure. This may help China increase its leverage over the global economy.

Why large economies change gradually

Even in periods when global economic trends can shift rapidly, larger economies tend to experience more gradual changes. For economies as large as those of the U.S., China or the European Union, major structural economic transitions can take decades. Factors such as shifting to new energy sources, allowing existing equipment to run to its natural lifespan, supply chain limitations and the need to retrain a workforce can extend the time it takes to transition a large economy.

Note: 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.

FAQs

How does China affect the U.S. stock market?

Global economies are closely connected, and many U.S. companies rely on products or components that come from China. When China’s economy slows sharply or faces disruptions, supply chains can tighten and that can pressure profits for companies that depend on those inputs, as the COVID-19 period illustrated. China also influences global markets because it is the world’s second-largest economy, and trade tensions such as tariffs can add uncertainty that investors may quickly price into U.S. stocks.

Is China the world’s largest economy?

China is the world’s second-largest economy, trailing only the United States. Some forecasters expect China could eventually surpass the U.S. in total economic output, but that is not certain and depends on future growth. One way to compare living standards is output per person, and the International Monetary Fund estimates that in 2025 China’s GDP per capita was $13,870 versus $89,680 for the U.S. ²

Should I invest in international stocks?

International stocks can play an important role in long-term diversification because different countries can lead at different times. “Given today’s market risks, it makes sense to allocate a portion of equity assets into non-U.S. stocks, including emerging market stocks,” says Haworth. For many investors, a broad fund that includes China alongside other emerging markets can provide exposure while also spreading risk across multiple countries rather than relying on a single market.