With the threat of tariffs looming under a Trump return, can China's stimulus and reforms protect its economy?
With Donald Trump returning to the White House, tensions between the U.S. and China could rise again. His administration is expected to reintroduce tariffs and trade restrictions as part of an "America First" agenda, putting pressure on China’s already struggling economy. While Mexico surpassed China as the U.S.'s largest trading partner in 2023, China remains a key driver of the US trade deficit, leaving it exposed to potential new tariffs.
Trump's trade policies could hit China hard, with tariffs potentially targeting up to 60% of its exports in a worst-case scenario[1]. Sectors such as technology, manufacturing and consumer goods would bear the brunt of these measures. Candriam economists predict that such tariffs could, in the worst case, shave up to 2% off China's economic growth, making it even harder for the country to meet its 5% growth target.
At the same time, China is grappling with internal problems such as high local government debt, a sluggish property market and weak consumer spending. The big question is whether Beijing can weather this storm and adapt to a more challenging global environment.
China's response to economic challenges so far
China has taken a number of measures to address its economic challenges. It has cut interest rates, reduced the amount of money banks must hold in reserve and introduced measures to stabilise its troubled property market. For example, mortgage rates have been cut and local governments have been encouraged to buy unsold homes. Beijing is also considering injecting more money into state-owned banks to support lending.
While these efforts have provided some short-term relief, such as a rebound in China's stock market, their overall impact remains limited. Key challenges such as falling property prices, weak consumer confidence and deflation - a decline in the overall price level - continue to weigh on the economy[2].
Looking ahead to 2025, Chinese leaders plan to increase government spending, issue more debt and further loosen monetary policy. Their strategy focuses on boosting domestic consumption, improving investment efficiency and supporting industries such as infrastructure and technology. But for these measures to work, the government may need to take bolder steps, including more significant reforms to open up the economy.
What does this mean for global markets?
China's economic woes are not just its own problem - they could also affect global markets. Countries that rely on Chinese demand, especially emerging markets in Latin America and Africa, could feel the pinch if China's economy continues to slow. A stronger US dollar under a Trump administration could weaken China's currency, the yuan, making Chinese exports more expensive and less competitive globally.
At the same time, China's deflationary pressures could spread to other economies, reducing inflation and posing challenges for export-dependent countries such as Germany. However, there may be some opportunities in the debt markets. As companies shift their supply chains away from China, countries such as Vietnam, Indonesia and Mexico are attracting more investment in manufacturing and logistics. Latin American copper producers, particularly in Chile and Peru, could also benefit as global demand for metals remains strong.
Can China's equity markets recover?
Despite the challenges, China's equity markets could rebound in 2025 thanks to ongoing stimulus efforts. The MSCI China Index is expected to rise 9% next year[3], helped by a low base after weak performance in recent years. Consumer-focused initiatives such as subsidies for electric vehicles and tourism are likely to continue, boosting key domestic sectors.
Sectors tied to domestic demand, such as e-commerce, education and consumer goods, could perform well. Internet gaming could also thrive, as its success depends more on product innovation than the broader economy. However, technology companies facing US export restrictions may continue to struggle. In this environment, stocks listed on China's mainland exchanges (A-shares) should outperform those traded in Hong Kong (H-shares), as they are less exposed to geopolitical risks.
China is taking steps to stabilise its economy, but uncertainties remain. The success of its plans will depend on how quickly and effectively it implements new measures. At the same time, Trump's approach to tariffs may be more strategic than purely punitive, potentially leaving room for negotiation. For investors, this uncertain environment could create opportunities in sectors supported by targeted policies. A selective approach will be essential to identify these opportunities and navigate the complexities of a changing global economy.
[1] China has prepared for the shock of Trump's tariff threats, despite its vulnerabilities
[2] Some investors draw parallels between China's current economic situation and Japan in the 1990s, when a property bubble burst, triggering decades of stagnation. Chinese bond market grapples with ‘Japanification’
[3] Source: Candriam