China’s economy has bounced back, at least modestly, from a significant slowing that occurred beginning with 2020’s COVID-19 pandemic and a series of restrictive policies that followed. At the same time, the country still faces considerable economic headwinds. Yet it remains an integral player in the global economy and the largest emerging market.
China continues to be hampered by pockets of fundamental economic weakness. “The property market is still upside down,” says Eric Freedman, chief investment officer at U.S. Bank Wealth Management. “Also, if you look at core demand from a consumer standpoint, it’s just not there.” These are factors that may limit China’s growth in the near term. Reports surfaced in May 2024 that to address the glut in vacant new homes, China devised a plan for local governments to purchase millions of unsold homes. That policy, if implemented, could help shore up the lagging property market.1
China’s trade activity is also under duress. In May 2024, President Joe Biden announced a new round of tariffs on electric vehicles, advanced batteries and other technology-related products. However, China’s economic prospects may not be dramatically affected. “The U.S. already had rules in place limiting imports of some of these products, so the marginal effect seems modest,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
Haworth also notes that while potentially taking a toll on China’s economy, tariffs imposed by the U.S. also hurt domestic consumers. “Tariffs tend to be inflationary, because you ultimately have to substitute higher-cost goods for lower-cost goods. That can add to U.S. consumers’ costs.”
After China’s consumer price index (CPI) declined 0.80% in January, prices rebounded in February through April, reflecting an uptick in consumer demand,2 a positive sign for the economy. Nevertheless, says Haworth, “Chinas economy does not yet indicate an ‘all-clear’ signal on prospects for accelerated growth. We still need to see consumer demand rise further.” Haworth adds that sustained economic improvement may require a rebound in global trade and possibly some government stimulus measures.
How do developments in China affect global markets today, and how should you assess investment opportunities based on China’s economic growth?
Promising signs in early 2024
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 2015.3 In April 2024, new home prices fell 3.5% compared to a year ago, with existing home prices down nearly 7% compared to year ago values.1 Exports, an important linchpin for China’s economic growth, fell 4.6% in 2023, the first annual decline in export activity since 2016.4 Once again, more encouraging data emerged in early 2024, with China’s exports growing in three of the first four months compared to the same periods in 2023.5 Despite recent weakness, China remains the largest global exporter of manufactured goods.6 However, ongoing trade battles with the U.S. aren’t likely to help boost exports.
At the same time, slowing domestic demand remains a challenge. “One reason for China’s property weakness is a broader economic concern that consumers have limited savings, having spent it down during the pandemic, and they have wealth tied up in housing, which has dropped in value. So they are not in a strong position,” says Haworth. “To the extent Chinese consumers are spending, demand is high for experiences, but not for goods.”
Investment market impact
China’s stock market alone makes up more than 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.