How China's Domestic Demand Can Work in Your Favor

China, the world's second-largest economy, is strategically pivoting to amplify domestic demand through initiatives like employment subsidies and market stabilization to counter ongoing tariff tensions and export reliance, as highlighted by American Century Investments. Given the uncertain outcome of these efforts, a diversified investment approach is recommended for institutional investors. The Avantis Emerging Markets Equity ETF (AVEM), for example, offers exposure to China (28% as of May 31, 2025) while mitigating single-market risk through broader emerging market diversification, allowing participation in potential Chinese growth regardless of specific domestic economic performance.

Analysis

Amid ongoing tariff tensions, China is strategically attempting to pivot its economy from export reliance towards domestic demand. The government is deploying several policy levers to achieve this, including local employment subsidies, paid annual leave, and measures aimed at stabilizing its volatile stock and real estate markets. As noted by American Century Investments, the success of these initiatives could significantly benefit both domestic Chinese companies and foreign businesses operating within the world's second-largest consumer market. However, the outcome remains highly uncertain, with the potential for tariffs to erode corporate profits despite stimulus efforts. Consequently, a diversified investment approach is highlighted as a prudent way to navigate this environment. The Avantis Emerging Markets Equity ETF (AVEM) is presented as a case study for this strategy, holding a substantial 28% of its portfolio in Chinese equities as of May 31, 2025, but mitigating single-country risk by diversifying across other emerging markets like South Korea, India, and Taiwan. AVEM's focus on companies with lower valuations and high profitability ratios further refines its strategy, positioning it to capture potential upside from a Chinese recovery while maintaining a buffer against localized economic weakness.

Key Decisions for Investors

• Investors seeking exposure to China's economic pivot towards domestic consumption should consider using diversified vehicles to mitigate risks from policy uncertainty and persistent trade tensions.
• A fund like the Avantis Emerging Markets Equity ETF (AVEM) offers a balanced approach, providing significant allocation to China while hedging downside risk through broad exposure to other emerging economies.
• Consider the value and profitability factor tilts within AVEM's strategy, which may offer a degree of defensiveness if China's stimulus measures fail to broadly lift its market.
• Monitor the effectiveness of China's domestic stimulus policies, as successful implementation could create significant momentum for consumer-facing companies within the portfolio.