JPMorgan Chase & Co has downgraded its recommendation on Chinese stocks from 'overweight' to 'neutral' due to rising concerns about economic challenges and volatility related to the upcoming U.S. elections.

The uncertainty surrounding the U.S. elections is significant, with analysts worried about potential disruptions and trade tensions between the U.S. and China.

The bank warns of the risk of a second tariff war following the November elections, which could escalate tariffs on Chinese goods from 20% to 60%, potentially having a severe impact on China's economy.

JPMorgan analysts believe that the impact of a new tariff war could be more severe than the previous one, further complicating China's economic recovery.

China's economic recovery has been deemed inadequate, with insufficient policy support and structural issues contributing to concerns about a possible severe impact from a renewed trade conflict.

Recent survey data revealed that China's manufacturing activity fell to a six-month low in August, raising doubts about the country's ability to meet its 5% GDP growth target for the year.

JPMorgan has revised its GDP growth forecast for China down to 4.6% for 2024, with most global banks expecting growth to be less than 5% this year.

The bank downgraded China's status in its emerging markets allocation, citing underwhelming economic recovery efforts and the potential for a new trade war with the U.S.

Investors are now looking for stronger stimulus measures from Beijing in response to the economic downturn, with upcoming inflation and trade balance data being closely monitored.

JPMorgan advises investors to reallocate funds previously earmarked for China towards markets where they are more optimistic, such as India, Mexico, Saudi Arabia, Brazil, and Indonesia.

This downgrade aligns with trends from other major firms, including UBS and Nomura Holdings, indicating a growing trend among investors to exclude China from their portfolios.

China's CSI 300 stock index has declined over 40% since its peak in 2021, amid escalating economic tensions with the United States and a domestic property crisis.