Key points
- US-China trade tensions remain fluid, and prolonged uncertainty could eventually weigh on growth. The April to June period may see a tariff-related slowdown, but consumer-facing sectors look relatively resilient.
- China’s first-quarter GDP growth was better than expected, indicating a modest but broadening recovery.
- The impact of US levies may be more contained than in the past, as China is less reliant on the US market, and companies are adapting in several ways.
- There is also policy flexibility to support the economy, with a pivot toward boosting consumption and moderately loose monetary policy.
- In April, a joint action plan by the State Council and the Commerce Ministry was announced to expand the services sector.
- Longer-term initiatives like extending pension and medical insurance coverage, along with investments in emerging industries, should also be supportive.
- If more Chinese companies are delisted from US exchanges, we’ll likely see a continued shift toward Hong Kong and A-share listings.
- A lot of bad news has already been priced into Chinese equities, and opportunities could emerge for investors with a long-term outlook.
Entering the second quarter of 2025, we assess the health of China’s economy, gauge the impact of US tariffs, and look at policy developments ahead of the upcoming Politburo meeting.
US-China trade tensions remain fluid, but the broader concern is that prolonged uncertainty could eventually weigh on growth. The timing of President Trump’s tariff announcement is doubly unhelpful given China’s economy is gradually improving. While the April to June period may see a slowdown due to trade friction, consumer-facing sectors look relatively resilient. For instance, China’s first-quarter GDP growth was better than expected, indicating a modest but broadening recovery. There was also an uptick in consumer confidence and retail sales, with higher spending in areas such as catering, cultural and sports goods, and furniture.
Meanwhile, the property sector hasn’t deteriorated, manufacturing investment is stabilising, and infrastructure investment has increased slightly thanks to early local government bond issuance. That trend may continue into the next few quarters, especially after the fiscal measures announced in March.
On the production side, manufacturing is showing solid growth, particularly in autos, electronics, and transport equipment, though some of that may be frontloading ahead of new tariffs.
The spectre of tariffs is nothing new
It’s clear the most immediate impact of US levies will be on China’s exports. That said, the broader effect may be more contained than in the past. China is now less reliant on the US market, with its exports there representing a much smaller share of GDP.
In response, we may see a further controlled depreciation of the yuan to cushion the impact, but China also has some policy flexibility to support the economy. There is currently a pivot toward boosting consumption, managing external risks with targeted stimulus, and maintaining a moderately loose monetary policy.
There is resilience at the corporate level, too. Chinese companies have dealt with tariffs since 2018 and have adapted in several ways, such as reducing their exposure to the US and increasing production overseas. Chinese firms have maintained pricing power in some sectors, such as air conditioners, bicycles, and power tools, because there aren’t many viable alternatives in the US market.
Depending on how other countries respond with their own tariffs, some Chinese companies may even find opportunities to gain global market share.
A dual-purpose policy approach
In policy terms, the annual Two Sessions plenary meetings clearly showed that the government is prepared to support growth in a targeted and measured way.
With interest rates already low, the focus has shifted to boosting domestic demand, particularly through measures that raise household incomes and support consumption. One important development in April was the announcement of a joint action plan by the State Council and the Commerce Ministry to expand the services sector. This is a smart, dual-purpose approach, given that services consumption supports GDP growth and creates jobs.
Longer-term initiatives like expanding pension and medical insurance coverage, along with investments in emerging industries that generate employment, could also have a lasting impact on growth. Furthermore, we may see more targeted support for the property market. Premier Li Qiang’s recent inspection tours suggest that additional easing measures could be on the horizon.
That said, policymakers are being cautious. They will likely avoid large-scale stimulus and focus instead on maintaining flexibility as external uncertainty, especially around trade, remains high. All eyes will be on the upcoming Politburo meeting for clearer direction.
Greater China Exchanges could benefit from a shift in listings
From a market and investment perspective, if more Chinese companies are delisted from US exchanges, we’ll likely see a continued shift toward Hong Kong and A-share listings. This started in 2021, and now about 60 per cent of Chinese ADRs (Chinese firms listed outside of the US but traded in US stock exchanges) are dual-listed – up from 30 per cent three years ago.
At the same time, the Hong Kong Exchange has made listing much faster, and global investors can still access these companies through regional markets. This boosts liquidity and strengthens Hong Kong SAR and mainland China as key financial hubs.
Overall, while a lot of bad news has already been priced into Chinese equities, and it is too early to say that we have seen an end to this period of volatility, opportunities could emerge for investors with a long-term outlook.
