China’s Economy Is Struggling. Why the Market Keeps Rising.

The Chinese isn’t growing as fast. Vendors at the Dounan Flower Market in Kunming, China. (Qilai Shen/Bloomberg)

China’s economy is struggling, with a spate of data out this week for July showing weaker-than-anticipated activity in retail sales and factory output. But in a world where bad news is good news, Chinese stocks have largely shrugged off the latest signs of an economic rut.

The MSCI China is up 27% so far this year, trouncing the S&P 500. Despite a steady string of data that shows the world’s largest economy is sputtering, the market has rebounded on the view Beijing will intervene if things get worse—and that could support stock gains in the near-term.

And things aren’t looking so great in the batch of data out this week, including weaker-than-anticipated July retail sales, which fell 3.7% from the prior year. Industrial output grew at 5.7%, its weakest level since last fall. In a note to clients, HSBC economists cited more challenges ahead for factory activity with tariffs and Beijing’s efforts to curb “involution,” or intense competition that is fueling price wars and deflationary pressures.

Confidence among businesses and consumers is still depleted, with net new loan growth turning negative for the first time in 20 years, according to Goldman Sachs economists. Overall fixed-asset investment slid 5.3%, the worst reading since the outbreak of Covid in early 2020, according to Pantheon Macro’s estimates.

The takeaway: China’s economy is stuck in a rut. Beijing’s steady incremental stimulus fuels growth spurts that have proven to not be sustainable.

Economists expect the economy to struggle in the second half. Exports—a bright spot—could see a deceleration because of all the pre-buying foreign companies did ahead of tariffs. That actually could be good news for Chinese stocks as it will likely push Beijing to increase its stimulus measures.

“Markets are looking through clear signs that activity is weakening. A number of factors are helping: Faith in the policy put is growing again, investors believe that bad data mean more stimulus and US-China political risk is declining,” says Rory Green, head of China research at TS Lombard in a note to clients, who still recommends an overweight on Chinese stocks.

Also helping: expectations that the recent truce between the U.S. and China—including extending the deadline for negotiations to avert higher tariffs—can continue and “fear of missing out” amid domestic retail investors after the rebound in the market this year.

That lack of a crisis feeling is likely to keep Beijing in incremental stimulus mode—providing a floor but doing little to change tack in a way that would give the economy a major boost.

Write to Reshma Kapadia at reshma.kapadia@barrons.com