- The US and Chinese economies differ in policy and growth, among other factors.
- Headwinds from China and steady growth in the US are reflected in stock markets around the world.
- Experts analyzed the economic and market prospects of these two superpowers.
The political and social conflicts between the United States and China are nothing new, but recent years have shown how dramatically the two superpowers have diverged economically.
The US is coming off a quarter of rapid growth. Her real GDP for the last three months of 2023 came in at 3.3%, well above expectations and on top of her impressive 5% growth in the previous quarter. This rejects the recession theory and calls for a soft landing are increasingly being heard from Wall Street.
In that regard, the International Monetary Fund on Tuesday raised its forecast for global GDP for the coming year to 3.1% from 2.9%, citing expectations for continued strength in the United States.
Meanwhile, China has been unable to emerge from its pandemic-induced lockdown and remains plagued by rising debt, deflation and turmoil in the real estate market, all of which are leading to a flight of foreign investment from the country's financial markets.
Arthur Laffer Jr., president of Laffer Tengler Investments, told Business Insider that the imbalance between the two economic superpowers has helped and hurt China, and the fact that the United States is not in recession also has an impact on China. He said it helps improve his outlook.
“A strong U.S. economy will buy more foreign goods from China because of the strong dollar,” he said. “This actually helps continue to support Chinese manufacturing and exports more than they would otherwise.”
Unfortunately, China's policy efforts have been “band-aids” that address symptoms rather than the underlying disease, and policy corrections have been directed at issues such as stock market declines rather than structural root causes such as real estate and housing supply. , Laffer Jr. added.
The Chinese government, led by President Xi Jinping, is trying to achieve its growth ambitions while navigating both domestic turmoil and the relative strength of its biggest rival economy, which faces its own uncertainties.
Contrasting consumer profiles
Joseph Seidle, senior market economist at JPMorgan Private Bank, said the vastly different consumer bases of the U.S. and China are one of the factors driving economic divergence.
In the United States, consumer strength and ongoing spending have so far helped stave off recession and underpin sentiment. The decision to lift several rounds of pandemic stimulus and increase unemployment benefits shows how eager the United States is to help its citizens.
“In China, we're seeing the opposite,” Seidl told Business Insider. “Policymakers are reluctant to do so, and China is instead prioritizing export growth. Overstimulating Chinese consumers could cause exports to slump and inflation to accelerate. I am concerned.”
Consumption in both countries is also moving in opposite directions. Seidl said Chinese citizens did not spend as much as expected in 2023, especially compared to what was expected after the pandemic.
“It will be very difficult for China's GDP to expand by more than 5%, as some think tanks have suggested,” Alfredo Montufar Hell, director of the Conference Board's China Center, told Business Insider. Ta. “Achieving this much growth in the face of increasing growth headwinds and the absence of low-base effects will require governments to withdraw their intention to ease and keep stimulus this year targeted. There will be.”
If China's economic outlook worsens further due to slowing demand and a weaker currency, the U.S. could see fewer imports from China, in addition to lower international prices for Chinese exports, Montoufar Hell said. said.
China's real estate turmoil
China has moved to deleverage and de-risk its property market in recent months, with the government seemingly acknowledging that the property boom that fueled a decade of growth may be over. .
Additionally, since a large portion of China's wealth is tied up in real estate, issues in this area have a significant impact on consumer sentiment and spending. Falling property values, in turn, undermine confidence and cause consumers to hoard cash, ultimately meaning less money and investment flowing through the economy.
Meanwhile, on Monday, a Hong Kong court ordered the liquidation of China Evergrande, the world's most indebted real estate developer. More than 1 million people in China are paying the company for homes that were never built, and experts say the incident complicates government efforts to support the real estate sector.
Although the U.S. real estate market faces headwinds in both commercial and residential areas, experts believe it does not pose a systemic threat similar to China's dilemma.
The housing market continues to struggle with high interest rates that are dampening home buying activity. But the bigger problem lies in the commercial market, where trillions of dollars worth of office value has been crushed by the lingering work-from-home trend.
Experts argue that while the peak-to-trough decline in the U.S. office market could reach 20%, office distress does not pose a threat to the financial system as a whole.
stock market performance
The contrasting fortunes of the two economies are reflected in the US and Chinese stock markets.
The decline in Chinese stocks reflects the exodus of foreign investors. Stock prices in China and Hong Kong have fallen by about $6 trillion since 2021, and the country's benchmark index significantly underperformed those of the United States and other large economies in 2023.
“This is not just an economic divergence, it's very important to market performance,” Seidl said. “Last year, the U.S. stock market rose about 25%, while various indexes in China fell about 25%.”
JPMorgan strategists said they expected inequality to narrow by 50% in 2024, with the U.S. expected to see more modest gains. He remains bearish on Chinese stocks, but said they should stabilize.
By way of background, the CSI 300 index hit a five-year low in January, and Bloomberg reported that the Chinese government is considering a $278 billion bailout to try to stabilize the market.
“I expect the Chinese market to recover, but in my opinion the trend is toward more pain because the problem is systemic,” Laffer Jr. said. “Meanwhile, the U.S. should perform well in 2024 with a strong economy, strong employment, strong earnings, and a strong dollar.”