Why China stopped being a market mover for US investors: Morning Brief

Julie Hyman

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China’s economic growth is slowing down and lagging estimates.

The nation’s economy expanded just 0.8% — or 6.3% on an annual basis — in the second quarter. The report caused at least three Wall Street banks to cut their forecasts for the year to 5%.

At one time, a disappointing Chinese data point like that would have triggered a drop in US stocks. In early trading following the report, US futures muddled along slightly in the red before turning positive as the regular session began.

So, what's changed?

For starters, China isn’t the irresistible growth story it once was. That 6.3% growth in the second quarter compares with an average of 8.8% over the past 30 years. And the country's demographics are becoming less favorable to continued growth as its population ages.

Second, the relationship between the US and China has deteriorated, both politically and economically. China's share of US imports has been declining as American firms have diversified their manufacturing base to countries like Vietnam and Taiwan — with plans to bring capacity back to the US as well.

And lastly, it's not a sexy story for many investors anymore.

Distant are the days when the hot acronym wasn't FAANG (or some related variant), but BRIC, which is short for Brazil, Russia, India, and China.

Bets on these economies — and optimism over emerging markets more broadly — were at the center of many buzzy trades in the years before the financial crisis.

Lori Calvasina, head of US equity strategy at RBC Capital Markets, explained the evolution of the Street’s approach to China over her career during an appearance on Yahoo Finance Live on Monday.

"I started back in 2000 over at Citi, and I used to call it the gospel of global growth," Calvasina said. That, she said, has changed.

"The sexy theme is reshoring and reindustrialization, and all these crises — the trade war, the supply chain shock, COVID, the inflation shock — it's all convincing us we need to invest more at home."

Calvasina also pointed to fund flow data tracked by EFPR which shows a slowdown in money flowing into mutual funds investing in China while dollars are moving more rapidly into US-focused funds.

And corporates are following investors in moderating their exposure to China.

Jens Nordvig of Exante Data called the China trend "problematic" in an interview last week.

"We've been used to China being the manufacturing hub for the whole world. And it still is," Nordvig told Yahoo Finance Live.

"But the big change that's happened over the last nine months is that big multinational companies are not investing in China in the way they used to."

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