Key takeaways
China’s economy continues to face fundamental challenges.
China’s government is trying to promote domestic consumer demand as an economic growth driver.
In 2024’s second half, Chinese stocks rallied, but as 2024 closed and 2025 began, retreated from peak levels.
China, the world’s second largest economy behind the U.S., continues to encounter challenges as it seeks sustainable ways to boost growth. In early 2025, China, a major exporter of goods worldwide, reported a record trade surplus. However, the country continues to struggle with meeting its domestic consumer spending goals, and economic growth remains below peak levels.
“China is trying to spur more consumer-led growth rather than investment-led growth, but so far, with limited success,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “While China isn’t downplaying the importance of its export activity, expanding internal demand is their bigger challenge.”
China’s economy in 2025 could be additionally affected by the potential for higher tariffs on Chinese imports under consideration by President Donald Trump’s new administration. Haworth notes that China’s recently-reported record trade surpluses are due in part to the potential tariff impact.1 “China exports grew due to efforts to get products shipped prior to new tariffs being implemented,” says Haworth. “This is more of a one-time impact rather than a new export boom on the horizon.”
Between 2000 and 2019, China became one of the world’s fastest-growing economies. Average annual growth during that period, (as measured by Gross Domestic Product or GDP) exceeded 9%. Since 2020, average annual GDP growth dropped by nearly half, to 4.7%. In 2024, China’s GDP outpaced expectations, growing at a 5.0% level, though slower 2025 growth is projected.2
“China’s government is looking to drive the economy more with consumer demand,” says Haworth. “However, they aren’t willing to do what the U.S. government did during the COVID-19 pandemic, and hand out money to individuals.” While the potential for higher U.S. tariffs could dampen export demand, Haworth says it creates an opportunity for China’s government to increase its focus on rekindling internal demand.
In 2025’s initial trading days, China’s equity markets softened. In early January, the CSI 300 Index, a key measure of Chinese stock performance, was off more than 3%, and 10.7% below its recent peak, reached in October 2024.3 “Markets are still working off some of the fervor that resulted from a modest government economic stimulus program implemented in early fall,” says Haworth. “That gave the market an immediate, positive jolt, but equities have slowly trended lower since October.”
“China is trying to spur more consumer-led growth rather than investment-led growth, but so far, with limited success,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management.
In January 2025’s early weeks, the CSI 300 Index is 36% below its February 2021 peak.2
With the new Trump Presidential term beginning in January 2025, the door appears open to escalating trade tensions. Actions could come early in the new administration. Trump campaigned heavily on imposing new tariffs on goods America imports from overseas, with a primary emphasis on China, though other countries such as Canada and Mexico are also targeted.
“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 more muted GDP growth.2
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 $86,600.2
Although it is the world’s second largest economy (after the United States), investors still classify China as an emerging market. Within that category, it is by far the largest single country contributing to the MSCI Emerging Markets Index, representing more than one-quarter of the Index.4 “Any investor who puts money to work in a broad, emerging market index likely owns a significant position in Chinese stocks,” says Haworth.
In 2024, the MSCI Emerging Markets Index generated a total return of 7.50%, outpacing the MSCI EAFE developed markets index, but significantly underperforming U.S. markets.4 By comparison, the S&P 500 earned a 25.02% total return.5 This continues a trend from recent years of emerging market underperformance.
“The growth story in emerging markets is not cohesive,” says Haworth. “Recently, we’ve seen strength out of commodity-producing countries such as Brazil and Mexico, boosted by higher oil prices. Exporting countries like China aren’t faring as well.” Haworth notes a recent dollar rally also contributed to emerging market performance weakness, as a stronger dollar detracts from net U.S. investor returns on foreign investments.
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, where Chinese stocks play a prominent role, may be an effective way to incorporate into your portfolio a position 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 the stock market up, inflation retreating and interest rates in flux, 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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