Key takeaways
China’s economy is experiencing an uneven recovery after an extended weak period but continues to face fundamental challenges.
Recent government and central bank actions are designed to spur economic growth.
Chinese stocks reacted positively to news of government stimulus, but it’s not clear if this marks the start of a sustainable market trend.
China’s significant economic challenges continue. But in late September, capital markets reacted enthusiastically to the announcement of new measures to try to boost the flagging property sector. Chinese stocks, which in the 2020s have mostly been in negative territory, changed course in late September and early October. In a matter of days, negative year-to-date returns turned sharply positive.
Despite its rebound, the CSI 300 Index remains significantly below its all-time high. At September’s close, the Index was more than 30% below its February 2021 peak.1
China’s government and central bank unveiled a series of stimulus measures, an aggressive response to some of its key economic challenges. It included interest rate cuts, looser bank regulations and a reduction in mortgage down payment requirements. In addition, China’s government boosted financial support so local governments can purchase unsold homes in the country’s overwhelmed property market.
How do these and other Chinese economic developments affect global markets today, and how should you assess investment opportunities?
Chinese consumers have put a lid on spending, a key factor in the leveling off of the country’s economic growth. “China’s recent stimulus measures are essentially designed to clean up excess supply in the housing market,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “The challenge is that the housing market at one time made up approximately 30% of China’s economy. They need to clean up the excess of homes to put consumers in a position to start spending.”
Until recently, the country experienced a building binge. It resulted in a property oversupply, which dragged home values down. “A key challenge is in part that consumers are locked into homes they couldn’t sell at the same time prices were coming down and mortgages were too costly,” says Haworth. “In addition, many of China’s wealth management products are linked to housing prices.” That had a negative impact on investment portfolios. In August, China’s home prices, on average, declined at the fastest rate in nine years.2
“China truly needs to resolve their housing issues,” says Haworth. “These measures are designed to shore up home prices by alleviating existing supply, restricting new supply, and stabilizing the market to improve investor confidence to support economic activity.”
China remains an economic powerhouse, maintaining its position as the world’s second largest economy (after the United States). However, the rapid growth that characterized recent decades has given way to a much more sluggish economy since.
China’s economy expanded at an annualized rate of 5.3% in 2024’s first quarter, slightly ahead of expectations, but second quarter growth fell to 4.7%.3 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.
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 8.7% in the one-year period ending in August 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. “The challenge is China’s trying to rekindle its export engine at the same time that U.S. leaders are looking to apply more tariffs on Chinese goods,” 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 eased.
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.
Is China’s recent stock market rebound sustainable? “There could be more room to run higher,” says Haworth, “but there are questions about how effective China’s recent stimulus efforts turn out to be, and if those ultimately translate into real economic growth.”
Investors with positions in overseas stocks may look for opportunities to put money to work in China. Even as the world’s second-largest economy,8 China is still classified as an emerging market, but its equity values represent the largest among all emerging market countries.9
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. In 2024, emerging market stocks generated more competitive performance From January through September, the MSCI Emerging Markets Index is up 16.86%, compared to 12.99% for the MSCI EAFE (developed markets) Index and 22.08% for the S&P 500.10
“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
“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.”
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.” Haworth notes, for example, that India’s economy has demonstrated phenomenal growth through government stimulus and manufacturing investment.
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 2023, China’s per capita GDP was $12,614 compared to $81,695 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 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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