What's on the horizon for China's economy?

Chinese equity markets have faced some headwinds since the start of the year. It is worth pointing out that historically, the first two months of the year have been volatile for Chinese stocks.¹ This is due to the pause in macro data and policy announcements because of the Lunar New Year holiday and as investors begin to firm up their predictions for the upcoming year’s economic growth and policy path.

Investors will get a concrete update when China’s “two sessions” national legislature convenes and the combined January and February monthly economic data points are released.

It’s no surprise that this annual vacuum in Chinese data and policy announcements, coupled with tariff and policy uncertainties from an incoming US administration, have led to a bumpy start of the year.

While I expect the new White House administration to announce tariff actions early on and foresee retaliative measures from the other side, my base case is still that markets are likely to see through this initial fiery exchange and that there will be some form of compromise later on in the year.  

More important to China markets this year, is the domestic economy. It’s clear to me that the economy has started to recover, albeit unevenly, at the end of last year, aided by signs of a stabilizing property market and improved household confidence. Whether these two important variables can hold and improve is still unknown, though initial indicators suggest cautious optimism.      

For example, home sales from the secondary property market have been gaining steam recently when compared to a year ago and the December Caixin PMIs hit a 7-month high in the services sector though showed a slight weakening in the manufacturing sector. ² Still, China’s economy has shifted over the years towards being more services-led, and so an amelioration in the services PMI could be seen as being more important from a labor market point of view.

Ultimately, the economy trajectory for 2025 lies in the hands of policymakers. Policy support is needed for the property market as well as to counteract any tariff measures. In December, the Central Economic Work Conference clearly struck a very pro-growth tone, with promises of a conducive monetary and fiscal policy environment. There have been promises of further supportive measures not only for the economy, but for the onshore stock market as well. For example, the PBOC’s newly established unlimited swap facility has already been enacted to prevent any disorderly fall in stock prices.³

As we move through this volatile period, I remain optimistic that China’s onshore market can outperform in the coming year as the downside risks appear to be mostly priced in while investors are giving barely any credit for the upside potential.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.