Key takeaways
China’s economy is experiencing an uneven recovery after an extended weak period but continues to face fundamental challenges.
Consumer demand is lagging, and the property market is hurting.
Emerging market stocks made a solid recovery in the second quarter, despite these challenges.
China’s economic struggles since the outbreak of the COVID-19 pandemic in early 2020 changed the trajectory of what had been one of the world’s fastest growing economies. The country took drastic measures to tamp down the spread of COVID, including virtual shutdowns of whole cities, which took an economic toll. While China’s economy has mostly returned to normalcy, the recovery has been uneven.
In contrast to the U.S. economy, consumer spending in China languishes, as its government has not provided the kinds of stimulus that occurred in the U.S. following the COVID outbreak. “If you look at core demand from a consumer standpoint, it’s just not there,” says Eric Freedman, chief investment officer for U.S. Bank Wealth Management. “In addition, China’s property market is still upside down,” a consequence of significant overbuilding. Rising trade tensions with the U.S. present another challenge for China’s economy.
“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
Despite current headwinds, China’s economy expanded at an annualized rate of 5.3% in 2024’s first quarter, slightly ahead of expectations.1 However, this represents a significant change for China’s economic trajectory compared to the first part of the 21st century. “China is gradually transitioning from its emerging market stage to a developed market stage, where growth will be slower than was the case in recent history,” says Haworth.
How do developments in China affect global markets today, and how should you assess investment opportunities based on China’s economic growth?
Significant property sector challenges and export weakness are major contributors to China’s economic malaise. New home prices faced their steepest decline last year since early 2015.2 Property investment fell 10.1% on a year-over year basis from January to May 2024. Average new home prices have declined for 11 consecutive 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 More encouraging data emerged in early 2024, with China’s exports growing 7.6% in the one year period ending in May 2024.5 Despite recent weakness, China remains the largest global exporter of manufactured goods.6 However, ongoing trade battles with the U.S. and other countries aren’t likely to help boost exports.
At the same time, slowing domestic demand remains a challenge. “One reason for concern about China’s property weakness is that consumers have limited savings, having spent it down during the pandemic, and much of their wealth tied up in housing, which has dropped in value. So they are not in a strong position,” 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 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. “Chinese consumers are still focused on rebuilding savings they spent down during COVID-related shutdowns. They are holding off on buying things like durable goods,” says Haworth.
Nevertheless, China’s status as the second largest economy in the world continues to position it as an important player on the global economic stage.8 With Chinese manufacturing back online, global supply chain issues have eased.
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.
“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.
China’s stock market alone makes up 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 the largest among all emerging market countries.
International stocks can contribute to a well-diversified portfolio. “There are reasons to include emerging market exposure in your asset mix,” says Haworth. “After all, despite trade tensions, we’re still a globalized economy.” Emerging market stocks struggled significantly in 2022 and lagged performance of developed global markets in 2022 and 2023. However, in 2024’s first half, emerging market stocks began to recover ground. The MSCI Emerging Markets Index gained 5.0% in the second quarter (outpacing the S&P 500 and the MSCI EAFE Index measuring developed market performance). From January through June, the MSCI Emerging Markets Index is up 7.49%.9
“A significant part of the emerging markets index is technology-oriented, and as was the case in the U.S., those stocks did particularly well, especially companies based in Taiwan and South Korea,” says Haworth. “The emerging markets index provides significant exposure to Chinese stocks since they make up about one-quarter of the MSCI Emerging Market Index. 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 recent times, a stronger dollar created headwinds for emerging market investors. When U.S. investors put money to work in overseas stocks, a stronger dollar detracts from net performance.
China’s equities 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 needs to stabilize.”
China’s stock market started 2024 in a positive direction, but currently stands relatively flat for the year. 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, the most recent year in which data is available, 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.
Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.
