Analysis: China’s economy and its influence on global markets

China’s remains among the largest global economies, but the country faces significant economic headwinds. The nation has graduated from years of annual double-digit economic growth. Nevertheless, China remains a major player that draws significant attention from trading partners. It ranks as the second-largest economy worldwide (trailing only the U.S.). ¹

President Donald Trump’s agenda places significant emphasis on reframing trade relations with China. To reduce dependence on Chinese-made goods and promote domestic manufacturing, President Trump implemented varying tariffs on Chinese imports. Early in the new administration, the U.S. applied 10% tariffs to China. That quickly doubled to 20% and eventually totaled 145%, threatening to cripple trade significantly.

On May 11, 2025, the United States and China announced a 90-day agreement that reduced U.S. tariffs on Chinese goods to 30%. At the same time, China reduced tariffs on U.S. goods it imports to 10%, from previous high levels of 125%.

China’s freight activity to the U.S. is slowing

As China modernized its economy beginning in the 1980s, it quickly emerged as an economic power, leveraging its low-cost production ability. While China’s middle class rapidly grew, exports drove the country’s economic growth. Entering 2025, the U.S. was the largest customer for Chinese goods. ²

In today’s environment, the Trump administration’s determination to reduce Chinese imports could have negative economic implications for China. In May, China increased total exports, with gains in Europe and Latin America offsetting slowing U.S freight shipments. The U.S. share of China’s exports continues to decline, with the final tariffs a factor in the pace of change.

Tonnage of freight in route from China to the U.S.

“China is trying to replace U.S. business by stepping up exports to other countries,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. China is seeking to ease the impact of reduced U.S. trade by selling more goods to Southeast Asian, Latin American and European countries. ²

China’s government has actively pursued policies to boost manufacturing activity, including incentivizing consumers to replace durable goods like washing machines. China is also seeking its own technological prowess. Notably, China-based electric car maker BYD has now surpassed Tesla in electric vehicle sales. ³

China’s property overhang

China’s housing glut first emerged in 2021 and remains another economic headwind. Easy local government credit and home builders’ overdevelopment led to a glut of homes, creating a potential financial crisis for the country. Excess supply means new home prices are falling, pressuring construction activity. ⁴ Before this crisis, China’s surging property development was a key contributor to the country’s rapid growth rate, accounting for close to one-third of its Gross Domestic Product (GDP). In recent times, China’s government has intervened to help the struggling real estate sector.

In the meantime, China is attempting to stimulate more domestic consumer spending to boost the economy, but China is experiencing a gradual transformation. In May, China’s retail sales improved, but it’s unclear whether the trend is sustainable. ⁵ “Consumers have some capacity to spend more in China,” says Haworth. “The country’s economy is not booming today, but it is still growing.” Signs of potential strain in their economy manifested in some economic data as well as capital market prices. China’s year-over-year consumer inflation rate has hovered between -1% and +1% for over two years, while their 10-year government bond yield fell from near 2.5% at the beginning of 2024 to near 1.6% at the beginning of 2025. Both metrics suggest sluggish activity and subdued future growth expectations. Additionally, China continues to withhold or discontinue some challenging economic data, such as youth unemployment, indicating other areas of economic struggle.

Investment challenges and opportunities

Most of the 2020s proved challenging for China’s equity markets. After a three-year losing streak from 2021 to 2023, stocks, as measured by the MSCI China Index, an important gauge of Chinese market performance, rose in 2024. With gains extending in 2025, helped by a weaker U.S. dollar which increases returns for U.S. investors.

TMSCI China Index: Total Returns 2021-2025

By late June 2025, the MSCI China Index is still 34% below its February 2021 peak. ⁶

Despite its size, investors still classify China as an emerging market. Within that category, it is by far the largest single country weight in the MSCI Emerging Markets Index, representing more than one-quarter of the index. ⁷ “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. By comparison, the S&P 500 earned a 25.02% total return. In 2025, global markets are performing better. Through June 20, the MSCI Emerging Markets Index is up 12.02% on a total return basis, compared to the S&P 500’s 2.12% total return. ⁸

Investing in international stocks

International stocks should be part of a well-diversified portfolio. “We believe global stocks are an attractive investment opportunity,” 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. In addition, emerging market indices are more broadly diversified by sector. “Today, as compared to the past, you have a lot more manufacturing and technology exporters,” says Haworth. “Many of these manufacturers outside of China may benefit from U.S.-China trade fallout.”

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 China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 568 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization. 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.