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The world's 2 biggest economies are moving in starkly different directions

Phil Rosen   

The world's 2 biggest economies are moving in starkly different directions
  • The US and Chinese economies are diverging in policy and growth, among other factors.
  • China's headwinds and steady growth in the US have been reflected in each country's respective stock market.

The US and China being at odds politically and socially is nothing new — but the last couple of years show just how dramatically the two superpowers are diverging economically.

The US is coming off a red-hot quarter of growth. Real GDP clocked in at 3.3% for the final three months of 2023, well above expectations and adding to a stunning 5% growth figure in the quarter before that. That's rebuffed the recession narrative, and an increasing number of soft-landing calls have flowed out of Wall Street.

To that point, the International Monetary Fund on Tuesday raised its global GDP outlook for the year ahead from 2.9% to 3.1% on account of its projections for continued strength in the US.

China, on the other hand, has stumbled out of its pandemic lockdowns and remains saddled with mounting debt, deflation, and a troubled real estate market, which have altogether resulted in 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 helps and hurts China, and the US's lack of recession is also helping boost China's prospects.

"A strong US economy buys more foreign goods from China with a stronger US dollar," he said. "This actually helps keep China's manufacturing and exports propped up more than they would be otherwise."

Unfortunately, though, China's policy initiatives are "band-aids" that address symptoms rather than the underlying illness, Laffer Jr. added, with policy fixes aimed at things like stock market declines, rather than structural root causes like real estate and housing supply.

Led by President Xi Jinping, Beijing will attempt to meet growth ambitions while navigating both its domestic tumult as well as the relative strength of its biggest rival economy — which is staring down uncertainties of its own.

Contrasting consumer profiles

Joseph Seydl, a senior markets economist at JPMorgan Private Bank, pointed to the starkly different consumer bases in the US and China as one driver of the diverging economies.

In the US, the strength of the consumer and the ongoing spending spree have so far helped stave off a recession and buoy sentiment. The decision to release several rounds of pandemic stimulus checks and raise unemployment benefits also shows just how willing the US has been to support its people.

"In China, you've seen the opposite," Seydl told Business Insider. "Policymakers have been reluctant to do that, and China is instead prioritizing export growth. They worry if they stimulate Chinese consumers too much, it could weaken exports or cause inflation to pick up."

Consumption in both countries, too, has moved in opposite directions. Chinese citizens didn't spend as much as expected in 2023, especially when drawn next to what was expected after the pandemic, Seydl said.

"I think it will be very difficult for China's GDP to expand by 5% or above as suggested by some think tanks," Alfredo Montufar-Helu, the head of the Conference Board's China Center, told Business Insider. "In the face of mounting growth headwinds and the lack of a low base effect, achieving such growth would require the government to backtrack on its intention to keep stimulus moderated and targeted this year."

Should China's economic outlook worsen further from softening demand or currency depreciation, the US could see a decrease in Chinese imports, Montufar-Helu said, in addition to lower international prices for Chinese exports.

China's real estate mess

China has moved to deleverage and de-risk its real estate market in recent months, and Beijing seems to have conceded that the property boom that fueled a decade of growth may have run its course.

And because a huge share of Chinese citizens' wealth is tied to real estate, trouble in the sector has an outsized impact on consumer sentiment and spending. Tumbling property values, in turn, have cratered confidence and compelled consumers to hoard cash, which ultimately means less money and investments 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 a million people in China have paid the company for homes that were never built, and the latest development complicates the government's efforts to support the property sector, experts say.

The property market in the US, both commercial and residential, faces headwinds but nothing that experts believe will be a systemic threat akin to China's dilemma.

The residential market is still struggling with high interest rates that have crimped home-buying activity. The bigger issue though is in the commercial market, where trillions of dollars worth of office value has been crushed by lasting work-from-home trends.

Experts say the peak-to-trough decline of the US office market could amount to 20%, but maintain that office distress won't be a threat to the wider financial system.

Stock market performance

The contrasting fortunes of both economies have manifested in the American and Chinese stock markets.

Falling Chinese equities have reflected the exodus of foreign investors. Chinese and Hong Kong stocks have shed about $6 trillion in value since 2021, and in 2023, the country's benchmark indexes have deeply underperformed those of the US and other large economies.

"This isn't just an economic divergence, it's mattered significantly for market performance," Seydl said. "In the last year, the US stock market is up about 25%, and in China, across a range of indexes you're down about 25%."

The JPMorgan strategist expects that 50% disparity to narrow in 2024. He predicts the US to see more modest gains, and while he remains bearish on Chinese stocks, he said they should stabilize.

For context, the CSI 300 touched a five-year low in January, Bloomberg reported that Beijing was deliberating over a $278 billion rescue package to help stabilize markets.

"I expect that the Chinese market will bounce around, but that the bias is towards more pain since the problems are systemic in my opinion," Laffer Jr. said. "The US on the other hand should do well for the 2024 period — strong economy, strong employment, strong earnings, strong dollar."

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