Can we still say that China is an EM outperformer?

Capital Economics asserts that China is no longer the standout emerging market, projecting its GDP growth to slow to around 2% by 2030 due to a structural decline in its construction and infrastructure sectors. This shift will negatively impact EM commodity producers dependent on Chinese demand, while growth momentum is expected to transfer to "Other EM Manufacturers" such as India, Southeast Asian nations, and North African economies, which are poised for approximately 5% annual growth. This signifies a fundamental rebalancing of global emerging market dynamics away from China's long-held dominance.

Analysis

Capital Economics projects China's long-held emerging market outperformance is concluding, with GDP growth expected to decelerate to approximately 2% by 2030. This structural slowdown, driven by diminishing returns and ballooning government debt in the construction and infrastructure sectors, marks a significant shift from its historical trajectory. The brokerage's China Activity Proxy anticipates growth undershooting the EM average in coming years.

This deceleration in Chinese demand is poised to negatively impact EM commodity producers, such as South Africa and Brazil, whose exports are heavily tied to China's construction sector. Capital Economics forecasts major EM commodity producers will see average GDP growth rates around 2%, further linking weaker Chinese demand to a downbeat view on oil prices.

The emerging market growth narrative is shifting towards "Other EM Manufacturers," including India, parts of Southeast Asia (Vietnam, Malaysia, Philippines), and North Africa (Egypt, Morocco). These regions are projected to achieve annual growth rates of nearly 5%, leveraging advantages like large labor supplies, low costs, and economic reforms.

This rebalancing signifies the end of an era dominated by China, with global manufacturing and investment momentum dispersing across a wider array of faster-growing emerging economies. India is highlighted as a key beneficiary, despite facing challenges, due to its inherent strengths and reform progress.

Key Decisions for Investors

• Reallocate emerging market exposure from China-centric strategies towards "Other EM Manufacturers" like India and Southeast Asia, considering their projected 5% annual growth.
• Evaluate potential headwinds for EM commodity producers, including South Africa and Brazil, due to reduced Chinese demand and its impact on global commodity prices.
• Monitor policy developments and reform progress in favored emerging markets, such as India's economic reforms and North Africa's competitiveness improvements, as key drivers for sustained outperformance.