Candriam 2025 Outlook: Is China Really Better Prepared for Trump 2.0?

With the threat of tariffs looming under a potential Trump return, can China’s stimulus and reforms protect its economy?
With Donald Trump returning to the White House in 2025, his second term is likely to see a resurgence of tariffs and export restrictions among other things, raising concerns about China’s ability to withstand a resurgence of ‘America First’ policies.  While Mexico surpassed China as the U.S.’s largest trading partner in 2023, China remains a key contributor to the U.S. trade deficit, leaving it particularly exposed to potential tariff increases.

At the same time, Beijing faces significant domestic challenges, including high local government debt, stress in the banking sector, a fragile property market, and weak consumer demand. Despite recent efforts to stabilise its economy, the critical question remains: Is China better equipped to manage these pressures in an increasingly complex global landscape?

Trump’s second term could see the return of aggressive trade policies, with tariffs targeting up to 60% of Chinese exports in a worst-case scenario[1]. Key sectors such as technology, manufacturing and consumer goods would come under significant pressure, adding to China’s existing challenges. Candriam economists estimate that these tariffs could reduce GDP growth by 1.5%-2% in the worst case, threatening China’s fragile recovery and its ability to meet its 5% growth target.

China’s response to economic challenges
To address its economic challenges, Beijing has announced a series of measures in September, including a 50 basis point (bps) cut in the reserve requirement ratio and a 20 bps cut in interest rates, with more to come. To stabilise the housing market, the authorities have lowered mortgage interest rates, eased down-payment requirements for second-home buyers and loosened borrowing restrictions for local governments buying unsold homes. Liquidity support has been extended to the stock market and capital injections into state-owned banks are reportedly being considered to boost lending. 

Despite these interventions, the scale of the measures remains limited, amounting to only about 1% of GDP[2]. While there has been some short-term relief – most notably a rally in Chinese equities – persistent deflationary pressures, weak consumer confidence and an unresolved property market downturn continue to weigh on the economy.

In December, the Politburo announced plans for a “more proactive and moderately loose” monetary policy in 2025[3], reminiscent of the post-2008 expansionary measures. At the China Economic Work Conference, officials reiterated their focus on stabilising economic growth amid rising trade tensions with the US. Chinese officials pledged to widen the fiscal deficit, increase debt issuance and ease monetary policy further. Key measures planned include a cut in key interest rates and a reduction in bank reserve requirements to support the struggling economy. While details remain unclear, the strategy emphasises stimulating domestic consumption, improving investment efficiency and supporting critical sectors such as infrastructure, technology and consumer spending.

Will it be enough?
However, success is likely to depend on the size and timing of the stimulus. For these initiatives to have a meaningful impact, an unprecedented level of stimulus would be required, combined with significant economic liberalisation and market-oriented reforms.

While speculation about possible further stimulus measures is growing, doubts remain about China’s ability to address its structural challenges and external pressures. Without additional targeted fiscal support, consumption stimulus and meaningful reforms, the risk of prolonged stagnation looms large, evoking comparisons with Japan’s economic trajectory in the 1990s[4].

For now, China’s policy interventions, while promising, remain insufficient to fully counter the economic pressures of a Trump 2.0 scenario. Investors and global markets are likely to remain cautious, awaiting clearer signs of decisive action in early 2025.

A Mixed Outlook for Global Markets
China’s fiscal stimulus could reshape emerging markets (EMs), where it remains a key driver of growth. Increased domestic consumption could boost demand for commodities, benefiting exporters in Latin America and Africa. However, reliance on debt-financed investment poses risks, especially for EMs dependent on Chinese financing. China’s deflationary trends could also spill over globally, dampening inflation and challenging export-driven economies such as Germany.

A stronger US dollar under a second Trump administration could weaken the Chinese yuan, which is under pressure from falling exports and declining foreign investment. Persistent deflation and limited monetary flexibility have reduced the attractiveness of Chinese local government bonds, which yield 1.5%-2.0%[5]. High-yield corporate bonds remain risky due to leverage, weak consumer sentiment and economic headwinds, while investment-grade issuers face earnings pressure. Commodity-exporting EMs could see lower revenues, weaker currencies and reduced investment as Chinese demand slows.

Despite these risks, there may be opportunities in emerging market bond markets. Supply chain shifts away from China are driving investments to Southeast Asia and Latin America, particularly in manufacturing, technology and logistics hubs. Emerging markets with high carry potential and room for monetary easing could benefit from increased capital inflows. Strategic exposure to Latin American metals exporters, particularly copper producers in Chile and Peru, could mitigate risks from global supply disruptions.

China’s Equity Market: Recovery on the Horizon?
Past performance of a given financial instrument or index or investment service, or simulations of past performance, or future performance forecasts are not reliable indicators of future performance.

China’s equity markets could rebound in 2025, supported by fiscal and monetary stimulus that acts as a floor for the markets. With the MSCI China Index forecast to grow earnings by 9% in 2025[6], the low base could set the stage for a rebound  especially as Chinese assets remain largely “unloved” by foreign investors.  Consumer-focused initiatives such as electric vehicle subsidies and tourism promotion are expected to continue, and targeted support for low-income households and families may be introduced.

Domestic-oriented sectors like e-commerce, consumer discretionary, and education may outperform, benefiting from stimulus policies. Internet gaming also presents potential, as its success relies more on product innovation than macroeconomic conditions. However, technology companies facing U.S. export restrictions and regulatory pressures could struggle. In this environment, A-shares are poised to outperform H-shares[7] due to their lower exposure to geopolitical risks and the strong dollar.

Despite measures to stabilise the economy and address critical challenges, questions remain about Beijing’s preparedness for a potential revival of Trump-era trade policies. The outcome will depend on the scale and timing of future stimulus efforts, as well as external factors such as Trump’s transactional use of tariffs, which may prove more pragmatic than expected. In such an uncertain environment, opportunities may arise in sectors supported by targeted policies, so selectivity will be essential to uncover these prospects and navigate the complexities of the evolving landscape.

[1] China has prepared for the shock of Trump’s tariff threats, despite its vulnerabilities
[2] Source:Candriam
[3] https://www.reuters.com/world/china/china-announces-first-monetary-policy-shift-since-2010-spur-growth-2024-12-09/
[4] 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’
[5] Source:Bloomberg
[6] Source:Candriam
[7] H-shares are shares of Chinese companies listed on the Hong Kong Stock Exchange, traded in Hong Kong dollars and open to all investors worldwide. In contrast, A-shares represent companies based in mainland China and listed on the Shanghai or Shenzhen stock exchanges. A-shares are primarily available for trading by mainland Chinese citizens, although foreign access is possible through special investment programmes such as Stock Connect.

Patrice Crosbourne (she/her)

Senior Consultant

FTI Consulting

+44 (0)7929847362 M

patrice.crosbourne@fticonsulting.com

200 Aldersgate | Aldersgate Street

London, EC1A 4HD, United Kingdom

www.fticonsulting.com

[1] China has prepared for the shock of Trump’s tariff threats, despite its vulnerabilities

[2] Source: Candriam

[3] https://www.reuters.com/world/china/china-announces-first-monetary-policy-shift-since-2010-spur-growth-2024-12-09/

[4] 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’

[5] Source: Bloomberg

[6] Source: Candriam

[7] H-shares are shares of Chinese companies listed on the Hong Kong Stock Exchange, traded in Hong Kong dollars and open to all investors worldwide. In contrast, A-shares represent companies based in mainland China and listed on the Shanghai or Shenzhen stock exchanges. A-shares are primarily available for trading by mainland Chinese citizens, although foreign access is possible through special investment programmes such as Stock Connect.