February 22, 2024
Equity

Here’s why China’s weak economy is good news for the US stock market

China’s economy is faltering as it suffers from a subdued post-pandemic reopening, a negative wealth effect, and a demographic implosion, according to market veteran Ed Yardeni.

But China’s pain is America’s gain, as it should lead to a reduction in geopolitical tensions and continued disinflation, both of which would be positive for the US stock market, he explained.

“China’s economy is in a property-led and fertility-led depression,” Yardeni said, adding that China is “the world’s largest nursing home.”

He highlighted that China experienced the lowest number of births on record in 2022 at 956,000, which is down 50% from 10 years ago.

Meanwhile, the fertility rate in China has been below 2.0 since 1991 and fell to 1.16 in 2021, meaning that parents aren’t having enough babies to replace themselves. The result is a shrinking population, with Yardeni observing that China peaked at 1.41 billion in 2021.

And the recent decline in China’s property values and stock market is especially painful for an aging population.

“Chinese consumers are likely to spend less and save more to offset the erosion of their wealth as their holdings in real estate and stocks depreciate,” Yardeni said.

While this is bad news for China, it benefits countries that import Chinese goods as it is helping fuel disinflation.

“China’s weak economy is good news for the US in particular, helping to moderate goods inflation without a recession here, a.k.a. ‘immaculate disinflation,” Yardeni explained.

To shore up China’s economy, the country needs to play nice with the rest of the global economy, and that should mean lowering geopolitical tensions.

“It would be in China’s interest to attract more foreign direct investment to shore up its economy. To achieve that, the Chinese government may have to become less confrontational in matters of foreign affairs, especially vis-vis Taiwan,” he said.

The combination of continued disinflation and a reduction in geopolitical tensions is ultimately good news for the US stock market, according to Yardeni.

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