China’s population is its secret weapon, and it’s why its economy could soon leave the U.S. behind.
With over 1.4 billion people, China has a massive consumer base that drives growth at a scale America simply cannot match.
While the U.S. deals with runaway debt and economic pressure, China’s government is making moves to stabilize its market, betting on its sheer numbers to power a comeback.
Earlier this week, China had one day of trading that was enough to make up for the market’s entire yearly losses.
On Monday, the CSI 300 index jumped 8.5%, the biggest single-day gain since 2008.
Chinese markets are mostly closed for the week due to the Golden Week holiday, which celebrates the 75th anniversary of the People’s Republic.
Investors, global and domestic, are starting to bet on China again after years of avoidance due to regulatory crackdowns on big tech companies.
Despite the excitement in the markets, foreign investors remain cautious. In August, industrial profits in China’s large companies fell by 17.8%.
That was the first drop in five months, and it is a sign of an ongoing economic slowdown. Producer prices have been falling since 2022, which has caused concerns about deflation.
All of this has shown up in the stock market, with the CSI 300 index trading at just 12 times forward earnings, a big discount compared to its global competitors.
Earlier this year, the Shanghai Stock Exchange saw its lowest levels in a decade. Even at these low valuations, investors are keeping their distance.
Over the last three years, shares have plummeted by 45%. The pattern has been brutal. Any small recovery is followed by a bigger decline.
The biggest challenge to rebuilding confidence in China’s stocks is a revival of domestic demand, which makes up more than half of the country’s GDP.
Beijing finally seems to realize the severity of its economic data missing growth targets.
The government has committed to an aggressive series of stimulus measures, including $114 billion in new stock purchase funds and cuts to borrowing costs.
Given the ongoing issues in China’s property market, it is unlikely the economic data has hit rock bottom just yet. Analysts expect more government support measures to roll out in the coming months.
These efforts may not be enough to lure back foreign investors, but China’s massive retail investor base, over 200 million locals, drives 80% of the country’s trading volume.
China’s central bank and other key players have launched a lot of policy actions to turn things around. Interest rates have been cut, and the banks are under less pressure to hold back reserves.
Beijing has also promised fiscal support and measures directly to lift up the stock market. The problem though is that these measures lack detail.
While nobody expects a tiny cut in interest rates to fix the country’s real estate problems, traders don’t seem to care.
The result has been a jaw-dropping market rally. In less than a week, the CSI 300 index soared by more than 20%. Hong Kong’s Hang Seng index has also performed incredibly well, rising 30% this year.
Compare that to the U.S. S&P 500, which gained just 19%. Timing played a big role here. You see, investors didn’t expect Beijing to act so soon.
Many are comparing it to the “whatever it takes” moment that European Central Bank President Mario Draghi is famous for.
Before this boost, investors had written off China entirely. Bank of America’s recent survey of fund managers found that pessimism was at an all-time high when it came to China.
Meanwhile, America is facing a growing debt crisis. Elon Musk recently warned that the country is on the fastest track to defaulting.
Interest payments ($2 billion every day) now exceed the Defense Department’s budget, and add up to over $730 billion annually.
Musk compared the situation to a person who has maxed out their credit cards with no way to pay them off. According to him, without cutting back on spending, America will go bankrupt.
The debt is projected to hit 122.3% of the country’s Gross Domestic Product (GDP) by the end of the year. This means the national debt has already surpassed the size of the entire U.S. economy.
The last time the country had a budget surplus was back in 2001, and things have only gotten worse since then. During Trump’s presidency, the national debt grew by nearly $8 trillion.
And it hasn’t slowed down under Biden, with projections showing another $1.9 trillion increase by the end of 2024.
If nothing changes, the U.S. debt-to-GDP ratio could hit 166% in the next 30 years. That’s an economic time bomb waiting to go off.