Markets

The Chinese Growth Engine is Sputtering

Published

9 years ago

August 11, 2015

Jeff Desjardins

By the turn of the millennium, China was the sixth most productive nation in the world with a GDP comparable with France or Italy at US$1.2 trillion.

Economic growth didn’t stop there, and GDP increased ten-fold over the last fifteen years to surpass US$10 trillion. In “real” terms using PPP, China is now actually the largest economy in the world.

The rest of the world has benefited extensively from China’s coming out party. Cheap products flooded the shelves of the developed world, and China bought the world’s raw materials when no one else wanted them. Unfortunately, every good time must come to an end.

A Sputtering Chinese Economy

It hasn’t exactly been a secret that China’s economy has been slowing. The above radar graph from a research note by Credit Suisse shows that the economic news out of China has been tough to swallow as of late. Today, China rattled global markets even further by announcing a devaluation of the yuan by 1.9% to combat poor exports, which fell by 8.3% in July. This is the country’s largest currency devaluation since 1994.

The real problem for China is far more entrenched: the country’s demographics have been a ticking timebomb for decades. The one-child policy meant that at some point in the future, the country would have an aging population that could not be replaced in the workforce.

Unfortunately these demographic headwinds are now in full gear now and they are hitting China at the worst possible time. The size of China’s working population is set to begin declining.

Decine in Chinese Working Age

Here’s a more in-depth look at China’s population pyramid from the 2010 census. Note that those who are 15 years old are now 20, and you will see that there are not many young people to enter the workforce, as well as the fact that there is an overabundance of males in the country (a separate demographic issue).

Population Pyramid for China

As the easy fuel for growth runs out, companies have sought to increase productivity by other means. Debt has soared for non-financial corporations in the country.

Chinese leverage increasing for corporations

In the long run, growth is a function of changes in labour, capital and productivity. The Chinese growth engine is now sputtering: there is a shortage of young people in the workforce, exports are decreasing, investment has topped out, and its soaring debt will surely impede future growth.

We must now ask (and answer) the question: When Will India be the Next China?

Related Topics:china demographics economic growth engine population

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Markets

The European Stock Market: Attractive Valuations Offer Opportunities

On average, the European stock market has valuations that are nearly 50% lower than U.S. valuations. But how can you access the market?

Graphics & Design

Alejandra Dander

An infographic showing that compared to North American and Asian stocks, the European stock market has lower or comparable valuations and low-to-moderate correlation.

European Stock Market: Attractive Valuations Offer Opportunities

Europe is known for some established brands, from L’Oréal to Louis Vuitton. However, the European stock market offers additional opportunities that may be lesser known.

The above infographic, sponsored by STOXX, outlines why investors may want to consider European stocks.

Attractive Valuations

Compared to most North American and Asian markets, European stocks offer lower or comparable valuations.

Index	Price-to-Earnings Ratio	Price-to-Book Ratio
EURO STOXX 50	14.9	2.2
STOXX Europe 600	14.4	2
U.S.	25.9	4.7
Canada	16.1	1.8
Japan	15.4	1.6
Asia Pacific ex. China	17.1	1.8

Data as of February 29, 2024. See graphic for full index names. Ratios based on trailing 12 month financials. The price to earnings ratio excludes companies with negative earnings.

On average, European valuations are nearly 50% lower than U.S. valuations, potentially offering an affordable entry point for investors.

Research also shows that lower price ratios have historically led to higher long-term returns.

Market Movements Not Closely Connected

Over the last decade, the European stock market had low-to-moderate correlation with North American and Asian equities.

The below chart shows correlations from February 2014 to February 2024. A value closer to zero indicates low correlation, while a value of one would indicate that two regions are moving in perfect unison.

	EURO STOXX 50	STOXX EUROPE 600	U.S.	Canada	Japan	Asia Pacific ex. China
EURO STOXX 50	1.00	0.97	0.55	0.67	0.24	0.43
STOXX EUROPE 600		1.00	0.56	0.71	0.28	0.48
U.S.			1.00	0.73	0.12	0.25
Canada				1.00	0.22	0.40
Japan					1.00	0.88
Asia Pacific ex. China						1.00

Data is based on daily USD returns.

European equities had relatively independent market movements from North American and Asian markets. One contributing factor could be the differing sector weights in each market. For instance, technology makes up a quarter of the U.S. market, but health care and industrials dominate the broader European market.

Ultimately, European equities can enhance portfolio diversification and have the potential to mitigate risk for investors.

Tracking the Market

For investors interested in European equities, STOXX offers a variety of flagship indices:

Index	Description	Market Cap
STOXX Europe 600	Pan-regional, broad market	€10.5T
STOXX Developed Europe	Pan-regional, broad-market	€9.9T
STOXX Europe 600 ESG-X	Pan-regional, broad market, sustainability focus	€9.7T
STOXX Europe 50	Pan-regional, blue-chip	€5.1T
EURO STOXX 50	Eurozone, blue-chip	€3.5T

Data is as of February 29, 2024. Market cap is free float, which represents the shares that are readily available for public trading on stock exchanges.

The EURO STOXX 50 tracks the Eurozone’s biggest and most traded companies. It also underlies one of the world’s largest ranges of ETFs and mutual funds. As of November 2023, there were €27.3 billion in ETFs and €23.5B in mutual fund assets under management tracking the index.

“For the past 25 years, the EURO STOXX 50 has served as an accurate, reliable and tradable representation of the Eurozone equity market.”
— Axel Lomholt, General Manager at STOXX

Partnering with STOXX to Track the European Stock Market

Are you interested in European equities? STOXX can be a valuable partner:

Comprehensive, liquid and investable ecosystem
European heritage, global reach
Highly sophisticated customization capabilities
Open architecture approach to using data
Close partnerships with clients
Part of ISS STOXX and Deutsche Börse Group

With a full suite of indices, STOXX can help you benchmark against the European stock market.

Learn how STOXX’s European indices offer liquid and effective market access.

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