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
“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.”
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
Despite its positive year-to-date return, by late November, the Index was 35% below its February 2021 peak.2
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.”
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
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
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.
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.”
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.
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 2024, China’s per capita GDP was $12,970 compared to $86,600 for the U.S., based on International Monetary Fund 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 more interest rate cuts likely, 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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