China’s Struggling Economy Masks a Promising Investing Landscape

Investor sentiment toward China has soured after a tough year for the economy and stock market. But the painful economic transition is also creating real opportunity.

China is struggling to revive investor confidence after a particularly tough year for the world’s second-largest economy. But the negative headlines mask a more nuanced picture of an economy in transition, offering select opportunities in fixed-income and equity markets.

Pessimism toward China was on full display in the stock market last year. The MSCI China A Index of onshore stocks fell by 11.5% in US-dollar terms in 2023, a sharp contrast to the MSCI World Index of global stocks, which surged by 23.8%.

Chinese markets suffered because of government efforts to unwind the debt-laden property sector and the resumption of an anti-corruption campaign targeting various sectors. During this economic transition, policymakers were reluctant to provide substantial support for growth, which we view as an attempt to move away from China’s leverage-dependent growth model. As a result, corporate earnings were weak and investor sentiment soured.

China’s real GDP grew by 5.2% in 2023, according to official data released in January. While that’s a marked improvement from the 3.0% growth rate in 2022, it’s still a far cry from the pre-pandemic era, when annual growth averaged 7.4% in the decade through 2019. In 2024, we believe a potential pivot by the US Federal Reserve toward lower rates could help improve sentiment toward Chinese assets, though additional policies to stabilize the property market and support growth will be essential to bolster confidence.