Markets
China, its economy, and how it impacts your investment portfolio
By Jason Crumley 24 November 2022 5 min read
In our series on China and its impact on the global economy, we dig into the implications of recent events to help investors better understand this particular region and make informed decisions about their investment portfolio. This information is not intended to encourage or discourage investment in specific geographic regions or specific companies. Similar to all countries, there are risks associated with investment allocation and security selection decisions.
China’s prominence in the global economy has increased significantly in recent decades as the country has grown to become the second largest economic engine in the world, behind the United States. Despite its prominence on the world stage, escalating tensions with major partners threaten supply chains and increase regional risk. This, in turn, can have significant implications for investing in both regional and global portfolios.
China’s impact on your portfolio
If you’re paying close attention to your portfolio, some of the recent fluctuations you’re noticing, whether up or down, may be a direct result of what’s happening in China. Individual securities that lie within a more broad portfolio could have significant exposure to countries like China through direct sales or supply chain logistics. For example, companies like Apple, Boeing, Nike and Starbucks each have varying degrees of exposure to China as some sell their product within the country and others use it to manufacture products.
These companies could be impacted by policy changes or supply chain disruptions as witnessed by Apple’s Foxconn assembly facility shutdown in Zhenzhou, China in early November due to the country’s zero COVID-19 policy. Similar to Apple, Nike relies on China from both a direct sales and manufacturing perspective. Greater China represented 16.2% of Nike’s total revenue in 2022 while manufacturing 20% of both Nike brand footwear and apparel. Both Apple and Nike are recognized market leaders in their respective industries and are both widely held in many global portfolios.
China’s rise to a global economic power
China is the second largest contributor to global gross domestic product (GDP) and according to the International Monetary Fund (IMF), represents 18% of global GDP in 2022. This is a dramatic increase from 2000, when China’s GDP was ranked sixth behind the US, Japan, Germany, United Kingdom and France. The dramatic growth of China’s economy can be traced further back to 1978, when its government introduced economic reform that liberated state control over productive assets1.
This resulted in a significant flow of investment into capital equipment, which helped spur a growing manufacturing industry and improved efficiency. More recently, China has continued to be a global leader in economic growth and according to the IMF, China’s 8% GDP growth in 2021 was second to only India when compared to the world's largest economies. China’s role as the second largest GDP in the world improves its ability to influence global markets on both the supply and demand side.
Global GDP - GDP estimate (2022 US$ trillions)
Source: International Monetary Fund, World Economic Outlook - October 2022
Relationship with global trade partners
Trade relationships have evolved between various countries and remain an important part of international diplomacy. When these relationships flourish or deteriorate, your portfolio can also feel the impact. We’ve recently witnessed trade tensions escalate between China and the US in the semiconductor industry. The US also announced the implementation of additional export controls on certain advanced computing and semiconductor manufacturing equipment, aimed to reduce China’s access to advanced computing technology. That said, China continues to maintain strong economic partnerships with a number of countries, including the US, and the global flow of goods and services is an important part of business planning. Our investment portfolio can sometimes feel the pain of supply chain disruptions and trade relationships can play an important part in business continuity and company success.
China’s trade balance
Source: China Customs
Note:
- The Association of Southeast Asian Nations (ASEAN) includes: Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, Vietnam
- The European Union (EU) includes: Belgium, Denmark, Germany, France, Ireland, Italy, Luxembourg, Netherlands, Greece, Portugal, Spain, Austria, Finland, Sweden, Cyprus, Hungary, Malta, Poland, Estonia, Latvia, Lithuania, Slovenia, Czech Republic, Slovakia, Bulgaria, Romania, Croatia
Top imports and exports
When most think about China’s exports, electronics such as televisions and cell phones, as well as textiles such as apparel and athletic wear, immediately come to mind. Electronic technology advancement is an area that has received a lot of attention in 2022 as the US and China attempt to secure and advance semiconductor technology. Semiconductor supply chain and technology advancement has a significant impact on global manufacturing in a variety of products we use every day such as cell phones or computers.
The country is also a major manufacturer and exporter of industrial and electrical machinery, furniture, vehicles, along with toys and sports equipment. Major imports to China are heavily weighted to raw materials used in manufacturing such as iron ore and copper. The country also imports a significant amount of crude oil to fuel the country’s transportation needs and economic growth. Additionally, China is the global leader in soybean imports and is supplied by the world's two largest producers, the US and Brazil. While some broad-based global portfolios may not be directly invested in China, there are other things to consider such as China’s role in manufacturing or supplying the items necessary for global industries to continue operations.
Conclusion
Through a deeper understanding of China’s prominent role in the global economy, we can see the relationship between the country and investment opportunities or risks. Important considerations like geographic allocation can have a significant impact on investment returns and should be considered in the context of more broad portfolio construction. By considering not just direct, but indirect exposure to China, investors can get a better appreciation of their true exposure to these and other global jurisdictions.
In future articles, we will further explore major events impacting China as well as the consequences of policy decisions on the economy and its impact on investing. We will also dig into and provide detailed information on specific sectors, their relationship with China, and relate it to the global investment landscape.
Hu and Khan. “Why is China Growing so Fast?” International Monetary Fund Apr. 1997.
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