Why China’s faltering economy could soon become a top-of-mind concern for the US stock market

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China economy

China’s slowing economy could weigh on US-listed stocks in the second half of 2023.REUTERS/Kim Kyung-Hoon

  • US stocks have started 2023 on a tear, with the benchmark S&P 500 up 14% year-to-date.

  • But China’s slowing growth poses threats to the rally, given American companies’ huge business exposure to the Asian economy.

  • US-listed companies’ profits could fall if the world’s second-largest economy keeps floundering.

China’s economy is floundering – and that could be bad news for Wall Street.

From a slowdown in industrial production to plunging import and export levels, investors are assessing warning signs that Beijing is struggling to restart growth after it ended its hard-line zero-COVID restrictions late last year.

The People’s Bank of China has responded by slashing key interest rates, in a hope that lower borrowing costs will revive slumping spending levels.

But even those measures have failed to soothe investors, with the benchmark CSI 300 stock-market index slipping 0.2% last week after the bank lowered mortgage-linked loan repayment rates.

And stagnating growth in China could soon become a pain point for US stocks – which have started the year on a breakneck tear – as well.

The AI craze has fueled a massive rally for mega-cap tech stocks like Nvidia and Microsoft – with their colossal share-price gains lifting the benchmark S&P 500 14% and the Nasdaq Composite 31% year-to-date.

But many of the stocks that are surging do huge amounts of business in China, so could see their earnings take a hit if the PBoC’s latest efforts fail to spark a revival.

Big Tech giants Nvidia and Tesla both feature in a list of the 25 listed companies most exposed to the world’s second-largest economy, according to a list published by Bank of America earlier this year.

Apple and Ford also manufacture vast amounts of goods in China, while Nike and Starbucks derive a significant proportion of their earnings from selling to people there.

US-listed Chinese companies are already suffering from the slowdown, with shares in the e-commerce giant JD.com plunging 35% year-to-date.

It’s been easy for investors to play down China’s slowdown as a factor for stocks so far this year, with markets booming thanks to both AI and traders’ expectation that the Federal Reserve will soon start slashing interest rates.

But with growth re-emerging as a buzzword for top strategists, don’t be surprised if China’s economy becomes a top-of-mind issue soon.

Read more: China’s economy is way more screwed than anyone thought

Read the original article on Business Insider

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