Is China’s economy starting to recover from the disastrous impact of Covid-19? That question has been on the minds of investors for a long time. So far, there hasn’t been a definitive answer.

Last month, Financial Times reported that data showed China’s consumer inflation slowly edging up, hinting at a gradual recovery. But more recently, factory activity across the nation decreased this May, causing South China Morning Post to speculate that the recovery is “uneven.”

Meanwhile, many Chinese stocks have struggled against these economic tides, managing only marginal growth, if any. And if China’s companies aren’t making progress, the entire global stock market could be in trouble as well.

Are Chinese Stocks in Trouble?

One person who isn’t optimistic about China’s economic recovery is President Joe Biden. The president has taken a stand against China recently, opting for higher tariffs on imported steel and other products, such as semiconductors and batteries. These policies, intended to help safeguard U.S. industries and manufacturing, haven’t been good for Chinese stocks, as they stand to impact several important sectors. Biden also recently laid out his broader take on the Chinese economy to Time.

“You’ve got an economy that’s on the brink there. The idea that their economy is booming? Give me a break.”

A look at some of the most prominent Chinese stocks would suggest that Biden isn’t exactly wrong about the country’s economy. At first glance, it might appear that things are going well for China. But a more macro perspective shows that its growth trajectory isn’t so encouraging. Foreign Policy reports that, in the final quarter of 2023, China reported gross domestic product (GDP) growth of 5.2%, slightly ahead of its target. But as the outlet also notes, “to put things in perspective, China’s real GDP growth rate from 2011 to 2019 averaged 7.3 percent while 2001-10 saw average growth of 10.5 percent.”

The country’s struggles are also reflected by the financial markets, as many Chinese stocks continue to battle economic headwinds. True, electric vehicle (EV) leader BYD (OTCMKTS: BYDDY) is slightly in the green for the past month, experiencing some modest growth. Meanwhile, e-commerce giant Alibaba (NYSE:BABA) is down about 1% for the past month while Baidu (NASDAQ:BIDU) is down over 12% for the period. Finally, Tesla’s (NASDAQ:TSLA) China operations are looking increasingly questionable as sales continue to decline.

What Comes Next?

At this point, it’s hard to predict exactly where China’s economy will go from here. Despite a strong start during the first quarter of 2024, mixed reports are making for an uncertain outlook.

Aforementioned declining sales and factory activity aren’t the only factors with which investors should be concerned. China’s real estate market isn’t the growth-driving engine it used to be. On the contrary, it has gone into reverse with home prices having fallen throughout 2024. Additionally, deflation continues to weigh heavily on the Chinese economy, so much so that prices hit their lowest point since 2009 earlier this year.

As The Wall Street Journal reports:

“The usual remedy is large-scale government spending, interest-rate cuts and an expansion of the amount of money and credit in the economy. But Chinese officials are reluctant to go all-out on stimulus and risk reinflating a real estate bubble and adding to China’s already-colossal debt pile.”

Now, tariffs from the U.S. threaten to further compromise China’s ability to make up the ground it lost during the Covid-19 lockdowns and factory shutdowns.

If Chinese stocks are unable to recover, it could also pose negative consequences for both the global and U.S. market. It’s also worth noting that China’s risk isn’t confined to tariffs from the United States. According to Bloomberg, the European Union may be considering levying similar trade policies against China. Such a scenario would be even worse for the country, as 45% of its solar energy cells, electric vehicles (EVs) and lithium-ion batteries are exported to Europe. The U.S. accounts for only “0.2% of Chinese solar cell exports and 1% of EVs.” Imagine how much China would be impacted if EU leaders follow Biden’s example.

With that in mind, investors may be best advised to proceed with caution and heed Biden’s warnings when assessing potential investments both in Chinese companies and firms that depend on imported Chinese products. That said, perhaps the most risk lies with Chinese firms that depend on international export sales to drive growth.

On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.