A WORD ON

Jean-Marie MERCADAL
CEO
SYNCICAP AM

A few weeks after the start of Donald Trump’s second term as US president, what are its initial impacts on China, the main rival of the world’s largest economy?
Jean-Marie Mercadal, CEO of Syncicap AM, provides insight on the outlook for the Chinese economy and the latest market trends.

Donald Trump’s inauguration is seen as a global game changer⁽¹⁾. What impact is it having on China?

Donald Trump’s arrival as president of the United States has indeed disrupted the world order, both geopolitically and economically. For China, the main issue is the US’s imposition of new customs tariffs. In 2024, China had a record trade surplus of almost USD 1,000 billion, with a spike occurring in exports in December, probably due to stock-piling in anticipation of higher tariffs.

This trade surplus, of which USD 400 billion comes from trade with the US, shows the resilience of the Chinese economy, in spite of trade tensions. Moreover, China has diversified its trade partners with countries of the Belt and Road Initiative⁽²⁾, thereby lessening its vulnerability to US reprisals.

Sino-US relations began the year on a less tense note than expected. Presidents Xi Jinping and Donald Trump had constructive talks, and Trump ultimately decided to impose just a 10% hike on tariffs on Chinese products, which is relatively moderate compared to the 60% that he had threatened during his presidential campaign and to the 25% imposed on Mexico and Canada. There are several reasons for this more moderate stance, including US consumers’ sensitivity to price increases and the means of retaliation that China possesses, such as restrictions on exports of rare earths⁽³⁾, which are essential to the manufacture of electronic components. The People’s Bank of China has reserved the option of steering a devaluation of the yuan in the event that China’s economy is penalised by higher tariffs. It still holds more than 800 billion dollars in US Treasury bonds, which could weigh on the US bond market at a time when Wall Street is highly priced and would be vulnerable to rising bond yields. This is a scenario that Trump wants to avoid.

The MSCI China has risen by more than 10% (in dollar terms) since Trump’s inauguration. This compares to 2.0% by the S&P 500 and 2.7% by the Nasdaq. China is now better prepared for a trade war with the US than it was in 2018, and the balance of power is less in the US’s favour. Moreover, there remain some opportunities for cooperation between the two countries, and that could create a win-win situation. For example, Chinese companies possess the industrial capacity to set up joint-venture factories in the US, and figures such as Elon Musk, who played a key role in China’s electric vehicle ecosystem, could serve as go-betweens.

In artificial intelligence, China made headlines just a few weeks ago with announcements by DeepSeek* whose R1 complex reasoning model impressed with its efficiency and controlled cost. Meanwhile, Alibaba* announced significant progress in its Qwen2.5 Max AI model, which seems to be outperforming its competitors by far and in several fields. Shares of Alibaba* are up by 39% over the past two weeks and on the year to date, for that matter. This illustrates the vitality of China’s tech sector, despite restricted access to the most powerful US semiconductors.

Growth in 2024 met the government’s 5% target, but prices of real-estate – which accounts for almost 70% of household wealth – have dropped by 30% since 2021. The wealth effect is therefore quite negative, and consumer confidence is naturally very low. Youth unemployment stands at about 20%, and the strict regulatory measures of 2021 have also contributed to this loss of confidence.

To halt this downward spiral, the authorities have implemented a series of measures since September 2024. The government’s plan is three-pronged: restructuring of bad debt on local government balance sheets, stabilising the real-estate market through various technical support measures, and boosting domestic household consumption. The authorities hope that these measures, which, when combined with the stabilisation of equity markets, will create a climate favourable to renewed confidence and will encourage households to invest their savings in equities, rather than real estate.

Minimum wages have been raised in five regions, with increases ranging from 10% to 20%. For example, in Xinjiang, the minimum wage is being raised from 1,540 to 1,750 yuan, while in Shanghai, it is 2,690 yuan. The central government has also issued guidelines to protect entrepreneurs’ property rights and limit abuses of power, for the purpose of restoring household and business confidence. There is also the possibility of distributing consumer coupons to certain categories of persons.

China is at a crucial turning point. The government’s ability to implement effective reforms and to restore household and business confidence will be decisive for China’s economic future.

A concrete support plan is due out in early March at the “Two Sessions” meetings. By then, the government will have been able to assess the strength of consumer confidence after the week-long Chinese New Year holiday. Its goal is to boost domestic consumption, in order to make the economy less export-dependent. It is also counting on a more stable stock market to create an environment that is more favourable to renewed confidence, something that could draw investment flows from individual investors.

Investors will have to remain alert to political and economic developments in the coming months, as these will have a significant impact on the financial markets and the growth outlook. No escalation has occurred for the moment between China and the US. A constructive scenario between the two countries does not yet appear to have been priced in at current market levels.

Completed on 17/02/2025