Mitch on the Markets

September 5th, 2023

What Do China’s Economic Struggles Mean For The Rest Of The World?

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Are China’s Economic Struggles a Problem for the World?

In my Mitch on the Markets columns, I rarely cover Europe, China, or other non-U.S. economies. I tend to focus on domestic issues because they tend to be the biggest drivers of equity returns – after all, the U.S. is by far the largest and most important economy in the world.1

But mounting problems in the world’s second largest economy, China, have become so prevalent that I think it’s important to take a closer look and offer some insight.2

Economic data from China has been sluggish throughout 2023 – exports are falling, consumption has been weak, and property sector woes are well documented. In the past, China has bounced back from dips in output. But some are convinced that this time around, serious economic fractures are starting to form. On August 20, a headline in the Wall Street Journal framed the issue more bluntly, saying that “China’s 40-Year Boom is Over.”

What About the U.S. Market? Should You Remain Bullish?

U.S. stocks have enjoyed a strong first half of 2023. This is good news; however, some investors still feel a recession is possible in the months ahead, and there are valid reasons for concern.

I believe there are a few fundamental factors that investors should keep their eyes on to determine whether the market continues to post solid gains—or reverses course.

To better guide your investing decisions, I’m giving all readers access to our free, Market Strategy Report. In this report, we take a closer look at factors that we believe will have a big influence on whether stocks continue to climb, or give some back.

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

IT’S FREE. Download our Exclusive Market Strategy Report3

The era of blistering growth had a major impact on the global economy. World Bank data indicates that from 2008 to 2021, China was responsible for 40% of all global GDP growth. Over that time, the world’s per capita GDP grew by 30%, while China’s GDP grew by a staggering 263%.

China’s model for growth was largely powered by state investment – in factories, skyscrapers, low-cost manufacturing, roads, and exports. Between 2008 and 2021, about 44% of China’s GDP was tied to domestic investment in infrastructure and other hard assets, compared to about 20% in the U.S. As these investments propelled the economy and lifted people out of poverty, the state kept borrowing to build – this time in the form of residential real estate, which in some years accounted for over 25% of GDP.

The growth model worked well for decades, but now major problems are starting to emerge. Millions of apartments are unoccupied. According to a 2018 study, about 20% of all units – or about 130 million apartments – sit empty. Major property developers like Evergrande and Country Garden are on the brink of default and bankruptcy. And many parts of China have airports and bridges that barely see any traffic.

Saddled with huge levels of debt and with a return on investment (ROI) that’s been falling sharply, the country has effectively run out of things to build. The path back to growth requires a shift in the structure of the economy from investment to consumption and from manufacturing to services, in my view.

China appears to be doing neither.

Many analysts and economists – including myself – thought that the end of “zero Covid” in China would unleash a spending boom much like we saw in the United States. But that didn’t happen. Instead, households are saving at a much higher rate than they were before the pandemic, with many worried that the flailing real estate market is a threat to the broader economy. And where the rest of the world is dealing with excessive demand driving prices higher (inflation), China is facing the opposite problem – too little demand is resulting in too little inflation.

As for the shift from manufacturing to services, China also appears to be moving in the wrong direction of late. From 2012 to 2020, the services sector in China accounted for all the net job growth, with many landing in the high-skilled, ‘knowledge’ economy. But in the last two years, the service sector has lost a net 12 million jobs, which has also pushed youth unemployment past 20%. So battered are the prospects for college graduates that China stopped publishing youth employment statistics.

To stem the tide of weak consumption and service sector contraction, the government likely needs to implement some level of fiscal stimulus that involves stabilizing the real estate sector and encouraging consumer spending, while also reversing course on regulatory measures that have scared away foreign investors and entrepreneurs. It’s unclear if the government is willing to do any of these things.

Bottom Line for Investors

So, what does this all mean for the U.S. and the global economy?

For one, I believe we can probably put to rest the concern that China will overtake the U.S. economy in size anytime soon. China is approaching the limits to growth that can be fueled by manufacturing and infrastructure/real estate investment, and there appears to be political resistance to transitioning to a services and consumption-based economy. Furthermore, with trade restrictions and new export controls on semiconductors specifically, China is likely to encounter major headwinds on the road to major technological innovation – likely a key source of global growth.

China also has a major demographic problem. The legacy of the one-child policy means that China has a rapidly aging population, such that its roughly 1.4 billion population is likely to drop below 1 billion by 2080 and perhaps below 800 million by 2100. While those numbers are almost certain to change, the trend lower almost certainly will not.

Given China’s previously robust contribution to global GDP, we might reasonably expect to see some moderating growth trends. But it’s also true that other emerging markets can pick up the slack, and the U.S. can—and will—likely remain the world’s most powerful growth engine for years and decades to come. This keeps U.S. stocks in the ‘attractive’ category looking ahead, in my view.

But, of course, a continued bullish trend is not guaranteed in the U.S. market. Today, I am offering our Free Market Strategy Report. In this report, we take a closer look at factors that we believe will have a big influence on whether stocks continue to climb You’ll also get insight on:

• Two Factors Investors Should Watch in the Second Half of 2023
• What Tech Sector Earnings Are Telling Us
• Bottom Line for Investors

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

FREE Download – Market Strategy Report4

Disclosure

1 Wall Street Journal. August 20, 2023. https://www.wsj.com/world/china/china-economy-debt-slowdown-recession-622a3be4

2 Wall Street Journal. August 25, 2023. https://www.wsj.com/world/china/chinas-crisis-of-confidence-in-six-charts-8fd36f9f

3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Market Strategy Report offer at any time and for any reason at its discretion.

4 Zacks Investment Management reserves the right to amend the terms or rescind the free-Market Strategy Report offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

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