Will the Chinese market collapse under U.S. pressure?

China's economic growth by 2024 is expected to be 4.9%, while the U.S. economy is expected to grow by 2.7%. With this disparity, one would assume that the Chinese stock market would outperform.     

However, reality says otherwise. While the S&P 500 is up approximately 24.6% since the beginning of the year, the CSI 300 has only gained 18%, and Hong Kong's Hang Seng index is up 19.4%.       

Why the gap?     

While seemingly strong, China’s 4.9% growth falls short of the ambitious 5% target set by policymakers. This signals to investors that the economy faces challenges despite massive stimulus.      

Weak domestic demand and the troubled housing sector remain the issues. Of course, geopolitical risks — such as new sanctions and the looming threat of additional tariffs — also played their part.   

Meanwhile, the U.S. economy has defied expectations with its resilience. In early 2024, concerns that high interest rates would slow the economy raised fears of stagnation or recession.     

However, we have not seen any “landing.” The labor market remains strong, with initial claims for state unemployment benefits declining 1,000 to SA 219,000 in the week ending December 21.     

Separately, consumer demand, which drives more than two-thirds of U.S. economic activity, rose 0.4% in November, following a downwardly revised 0.3% increase in October.      

And, of course, expectations of lower interest rates from the Fed, record buybacks by U.S. companies, anticipated Trump-era policies like tax cuts to boost profits, and AI mania have helped.     

But will the situation change next year?    

While the Chinese market looks more attractive in terms of valuation compared to the U.S., it is too early to guarantee it will outperform, as many factors come into play when discussing market sentiment.    

For instance, the tariffs that Trump is expected to introduce against China would negatively affect China's large export sector, which could impact company results and the overall economy.     

Chinese policymakers will likely exceed expectations with fiscal and monetary stimulus in 2025, helping to offset the impact of tariffs. But will it be enough to achieve 5% growth?      

As for the U.S. market, even though the S&P 500's P/E ratio was 27.20 on December 30, 2024 — higher than the average range of 18.82 to 23.16 — some still believe there’s room for growth. 

For example, Wells Fargo and Deutsche Bank expect the S&P 500 to reach 7,000 annually, an 18% increase from 5,900. Bank of America predicts 6,666, Morgan Stanley forecasts 6,600, and JP Morgan expects 6,500. 

Meanwhile, MSCI China is expected to see about 7% growth in 2025.