The idea that China will soon become the world’s largest economy and replace the U.S. as the global leader is losing steam. This isn’t just because of geopolitical risks, although those don’t help. 

Despite major stimulus efforts, China is struggling to boost business activity and consumer spending. Industrial profits fell 27.1% in September, following a 17.8% decline in August compared to last year. 

On top of that, the country’s property sector is grappling with massive debts and severe liquidity issues, with the IMF warning that a prolonged downturn in China’s real estate market could worsen the situation. 

The hope is that the recent rebound in transactions in major cities will continue, following a series of measures introduced late last month to stimulate demand and shore up confidence. 

Unless these issues are resolved, it seems unlikely that the country will hit its 5% economic growth target for 2024, let alone achieve its goal of surpassing the U.S. in nominal GDP by 2030. 

The first headwind that comes to mind is geopolitics. With Trump back in power (and the Truth Social stock rally suggests this), trade wars could escalate, negatively affecting the country's export-oriented economy. 

Some studies estimate that a 1% increase in tariff-inclusive export prices at the company level causes a 0.35 percentage point drop in the profit margins of Chinese exporting companies. 

If the Republican candidate wins the election, an expected 60% increase in tariffs could have a significant impact on Beijing, potentially cutting two percentage points off China's economic growth.  

Another long-term problem is the state of the country's institutions, namely the lack of inclusiveness, which prioritizes control over efficiency and is not the ideal setting for economic growth.  

As Nobel laureate James Robinson pointed out, inclusive institutions provide equal opportunities and incentives for all, while extractive ones concentrate benefits in the hands of a few.  

Does this mean that China's stock market growth has ended? 

Not necessarily. Much will depend on the government's decisions to support the economy and stimulate growth. China is reportedly considering a new fiscal package exceeding 10 trillion yuan. 

This package would include 6 trillion yuan in debt over three years to help local governments with off-balance sheet debts and 4 trillion yuan in bonds to purchase wasteland and real estate. 

If the announced measures do not meet expectations, it could negatively affect the stock market, driving the mainland benchmark CSI 300 index lower rather than higher. 

Although the Chinese market may appear more attractive in terms of valuation than the S&P 500 and Nasdaq, it is vital to approach the outlook for Chinese stocks cautiously.