China's Weakening Domestic Demand and Its Implications for Global Exposure

China's domestic demand has entered a critical phase of stagnation, with cascading implications for global emerging market allocations. Despite a 5.0% GDP growth in the first half of 2024, driven by service-sector consumption and infrastructure investment, the second quarter saw momentum wane to 4.8% for the full year, signaling a structural slowdown [1]. This deceleration is compounded by a property market slump, which has eroded business confidence and constrained private-sector investment [1].

Industrial activity, a key barometer of economic health, has turned negative. The Caixin China General Manufacturing PMI for July 2025 fell to 49.5, marking a contraction in factory activity amid a 12% year-over-year decline in new export orders [2]. Global trade uncertainty and U.S. tariffs have further weakened external demand, while rising input costs—driven by higher raw material prices—contrast with falling selling prices due to oversupply and competitive pressures [2]. These dynamics suggest a fragile industrial sector, where cost inflation and weak pricing power are eroding margins.

Morgan Stanley's emerging market allocations, which include significant exposure to China via mechanisms like A-shares listings, face heightened volatility in this environment [3]. While the firm's portfolio has historically benefited from China's growth-driven momentum, the recent downgrade in sentiment—though lacking specific 2025 projections—highlights the risks of overreliance on a rebalancing economy. A prolonged slowdown in domestic consumption and investment could amplify capital outflows, disproportionately affecting emerging markets that rely on China-linked commodity demand.

The rebalancing of emerging market portfolios must now prioritize resilience over growth. Investors should consider reducing exposure to China-centric assets and diversifying into sectors less correlated with its cyclical downturns. For instance, Southeast Asian markets with stronger domestic consumption or African economies with commodity export buffers may offer more stable returns. However, such shifts require careful timing, as China's policy interventions—such as infrastructure stimulus or property market reforms—could temporarily stabilize growth.

In conclusion, China's weakening domestic demand underscores the need for a strategic reassessment of global exposure. With industrial indicators pointing to contraction and external demand under pressure, emerging market allocations must adapt to a lower-growth paradigm. The coming months will test the resilience of both Chinese policymakers and global investors, with the August 2025 PMI data serving as a critical barometer for near-term trends.

Source:
[1] China Overview: Development news, research, data, [https://www.worldbank.org/en/country/china/overview]
[2] China Caixin Manufacturing PMI, [https://tradingeconomics.com/china/manufacturing-pmi]
[3] Emerging Markets Portfolio, [https://www.morganstanley.com/im/en-us/individual-investor/products/mutual-funds/emerging-markets-equity/emerging-markets-portfolio.html]