As a result, exports from China to the US have substantially decreased. At its peak in 2017, nearly a quarter of US goods imports by value came from China.

By April of this year, that figure had fallen to just 8%, though a considerable amount may still be rerouted through third countries like Vietnam.

While much of the world has not followed Trump in increasing trade barriers against China, it does not imply they are not inclined to.

Industries across Asia, Europe, and beyond are facing substantial pressure from Chinese imports. The automotive sector has been particularly affected as China transitioned from a car importer to the largest exporter by volume in recent years.

China’s exports and imports by value

Source: LSEG Datastream

This notable export strength, alongside the relative decline in imports, signals a shift towards domestic brands.

However, the trade surplus also conceals a weakness: a lack of domestic demand. This is partly a conscious choice.

As is widely recognized, China’s economic model structurally favors investment over consumption, resulting in households retaining a smaller share of national income compared to countries at a similar developmental level.

Simultaneously, substantial resources were directed toward developing world-class infrastructure and manufacturing capabilities. Yet a considerable portion of this investment was funneled into residential real estate, resulting in a significant bubble that burst in 2022.

The fallout from the property bubble continues to resonate throughout the economy. A decline in apartment sales means fewer purchases of fridges, televisions, and beds, many of which would have been imported.

If imports had matched exports, Chinese consumers could have purchased an additional $100 to $200 billion worth of foreign goods.

Instead, consumer confidence remains historically low, although it has slightly improved compared to a year ago.

Chinese consumer confidence

Source: LSEG Datastream

Yuan too few

Another contributor to the weakness in imports—and strength in exports—is an undervalued currency, a long-standing grievance of the US government.

A country with such a significant trade surplus would typically experience upward pressure on its currency. Even after some recent appreciation, the yuan remains generally weak on a real trade-weighted basis.

China real trade-weighted exchange rate

Source: OECD

A weak currency typically boosts exports and restrains imports, which is why Trump advocates for a weaker dollar and a stronger yuan.

Such a change would assist in balancing the trade relationship between China and the rest of the world while enhancing the purchasing power of Chinese households, allowing for more foreign goods, services, and international travel.

The yuan’s exchange rate is managed by the People’s Bank of China (PBOC), making its level a deliberate choice rather than an inevitability.

While it makes sense for the yuan to appreciate gradually over time, the PBOC generally prioritizes stability above all.

This leads us to a final comparison between the US and China regarding equity markets. Although China can boldly present itself as an economic, military, and technological superpower, market valuations depict a contrasting reality.

Conversely, despite discussions about US decline during Trump’s unpredictable administration, the S&P 500 has consistently reached new record highs, even amidst ongoing geopolitical tensions.

Forward price-earnings ratios

Source: LSEG Datastream

Chinese equities are trading at a significant discount compared to US counterparts, especially when noting that the yield on a 10-year US government bond was just under 4.5% last week, while China’s equivalent stood at only 1.7%. This indicates a notable ‘equity risk premium’ in Chinese stocks, whereas US equities demonstrate minimal margin of safety.

Some of this disparity can be ascribed to unpredictable regulatory changes that rendered China “uninvestable” around 2021. Nevertheless, since then, authorities have adapted their approach towards Chinese equity markets.

Historically, Beijing regarded equity markets as secondary, considering speculation less vital than funding economic development through the banking system. Yet, banks now face constraints due to a struggling property sector, and the successes of other countries, especially the US tech sector, have illustrated how equity markets can stimulate innovation and business growth while also generating wealth for households—crucial in a country with an aging population and uneven social security coverage.

Thus, regulators now aspire to nurture a “slow bull market” with gradually rising equity values to propel economic growth and support Chinese families in saving for retirement.

To achieve this, corporate governance standards have been enhanced, and publicly listed companies are encouraged to distribute regular dividends, representing a much-needed transition towards a more shareholder-friendly environment.

Despite China’s remarkable economic successes, publicly traded companies have struggled to convert GDP growth into profit growth, resulting in disappointing equity returns. In contrast, the primary reason the S&P 500 enjoys a premium likely lies in its consistent earnings per share growth, outpacing other major markets.

The profitability of China’s industrial firms has been further hampered by overcapacity and intense competition, challenges that policymakers are addressing through “anti-involution” initiatives.

For equity investors beyond China’s borders, the combination of a depreciated currency, low valuations, and increased policy support is likely to be appealing.

China’s representation in major global equity indexes compiled by organizations such as MSCI and FTSE Russell has plummeted to around 3%, disproportionate to its contribution to global economic output and innovation.

Nevertheless, risks remain.

China’s unfavorable demographic trend is widely acknowledged, primarily due to the now-repealed one-child policy. Last year saw only 7.9 million newborns, the lowest figure since the Communist Party’s emergence in 1949.

Read: China’s population grew older and richer … [Jun 2023]

While life expectancy has risen considerably—now exceeding that of the US, a remarkable achievement—this does not mitigate workforce shrinkage and will inevitably restrict long-term GDP growth rates (once again, for equity investors, profits take precedence over GDP).

This trend may also incentivize innovation and technology adoption.

According to the International Federation of Robotics, China accounted for half of the world’s industrial robot installations in 2024, with most sourced from domestic companies for the first time.

China’s approach to artificial intelligence seems to emphasize practical applications rather than chasing cutting-edge models, contrasting with Silicon Valley’s winner-takes-all mentality.

Time will discover the efficacy of either strategy.

Total debt-to-GDP ratios

Source: Bank for International Settlements

A significant concern is the high levels of total debt (comprising household, government, corporate, and financial sector debt), which surpass those of the US when expressed as a percentage of GDP. Notably, the rate at which this debt has escalated is evidently unsustainable.

China enjoys a much higher savings rate than the US or any other large economy, with most of the debt being internal.

Thus, the issue pertains more to internal distribution than existential crises. However, in a slowing economy, servicing this debt becomes challenging, and someone must absorb the resultant losses.

A significant risk lies within the US-China relationship.

Both nations are striving to minimize dependency on one another, possibly giving China an advantage. However, the economies remain deeply intertwined, rendering total decoupling unrealistic.

Thus, a sharp rift over Taiwan or other flashpoints could trigger a substantial market sell-off, impacting markets globally, not just within China.

If the US were to impose sanctions against China, any financial institution would need to comply, or risk exclusion from the dollar system.

The US retains substantial leverage in this situation, a fact well understood by China.

This kind of conflict would harm all parties involved, making last week’s summit between Trump and Xi crucial, even if it did not yield any groundbreaking policy changes or resolutions on contentious issues.

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While friendly gestures don’t resolve deep-rooted disputes, they ensure that communication channels remain open. The strategic rivalry between the world’s superpowers is inevitable, yet it can be managed.

Ultimately, both sides—and indeed the entire world—stand to suffer should this rivalry escalate into outright conflict.

Izak Odendaal is an investment strategist at Old Mutual Wealth.