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Middle Kingdom: Middle Income

China is clearly top of mind for all investors. 

In October 2022, the Communist Party of China hosted its 20th National Congress. The leadership’s pronouncements did little to assuage concerns about rising geopolitical tensions between China and Western democracies, and Chinese equities, bonds and currency sold off in response. Yet recent policy shifts and the easing of Beijing’s “zero-COVID” policy have contributed to a strong rebound in Chinese assets over the past month. Inevitably, clients are now asking whether Chinese assets have fully discounted the structural and geopolitical headwinds to China’s economy and its earnings growth and, if so, do these assets present an attractive tactical investment opportunity?

We do not think so. As many of our clients know, we in the Investment Strategy Group have held an out-of-consensus view on emerging markets in general, and on China in particular, since 2012. That has prompted us to recommend only a limited exposure to emerging market assets in our clients’ portfolios. This report expands on our previous analysis, showing that China continues to face strong headwinds, including weak demographics, low levels of education, stalled reforms, rising debt and policy uncertainty, as well as “the weight of history.” These cannot be overcome without significant economic disruption and policy reversals. Therefore, despite their underperformance, Chinese assets do not fully incorporate these weak fundamentals and the threat of rising geopolitical risks, in our view.

The purpose of this report is to share the research and analysis that underlie our investment recommendations. This Insight begins with a review of the current state of China’s economy and financial markets. We follow with a discussion of the headwinds that will impede China’s ability to reach a sustainable high-income status. We then explain why we expect the Middle Kingdom to remain a middle-income country for the next decade. We conclude with the investment implications of China’s weakening economic outlook for our clients’ portfolios.

We invite you to read our views and investment recommendations in the report Middle Kingdom: Middle Income


This material represents the views of the Investment Strategy Group (ISG) in the Consumer and Wealth Management Division of Goldman Sachs and is not a product of Goldman Sachs Global Investment Research (GIR). It is not research and is not intended as such. The views and opinions expressed by ISG may differ from those expressed by GIR, Goldman Sachs Asset Management, LP, or other departments or divisions of Goldman Sachs.  Past performance is not indicative of future results which may vary.

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