A good start for 2025, but tariff uncertainty lingers

The Chinese National Bureau of Statistics (NBS) reported year-over-year (y/y) real gross domestic product (GDP) growth of 5.4% in 1Q 2025, which points to a good start to the year, as the Chinese government kept escalating its supportive policies since 3Q 2024.

On the demand side, domestic retail sales increased by 5.9% y/y in March, reflecting the positive impact from the government’s consumption subsidies. The successful rollout of CNY 150billion subsidies in 2024 encouraged the Chinese government to raise the scale to CNY 300billion in 2025, and the coverage was also expanded to include consumer electronics and furniture in addition to household appliance and automobiles.

Meanwhile, investment accelerated in March, particularly infrastructure (11.5% y/y during January-March vs. 10.0% y/y during January-February). This may have been supported by the increased government financing this year. Net government bond financing reached CNY 3.87trillion in 1Q 2025, in comparison to the CNY 1.36trillion one year ago.

Some factors contributing to the strong growth may not be sustainable for the remainder of the year. In response to U.S. tariffs, Chinese manufacturers and exporters managed to deliver as many goods as they could in the past quarter. Chinese export and industrial production increased by 12.4% y/y and 7.7% y/y. respectively, in March, due to front-loading. Following the U.S. implementation of 145% tariffs on Chinese imports, this momentum is likely to be disrupted, potentially putting the brakes on the growth drivers. 

What to watch for in the next stage?

Amid the huge uncertainty from escalating trade tensions, it is no longer appropriate to extrapolate future growth prospects with past data. With the high tariffs in place, China-U.S. trade is already slowing down. From 2Q 2025, Chinese GDP growth might decline substantially if there is no meaningful progress in U.S.-China negotiations to restore the trade flow. Meanwhile, it is increasingly important for the Chinese government to escalate its stimulus measures to offset the demand shock from tariffs. For the rest of this year, we might need to watch for three aspects of a China policy response:

• Potential negotiations between the U.S. and China: Last week, the U.S. exempted reciprocal tariffs on consumer electronics, and China clarified that semiconductor chips manufactured outside of the U.S. will not be subject to the 125% tariff. This might suggest both sides are mindful of the potential impacts on technology supply chains and could be open to negotiation. However, some other developments, including Chinese refusal to take delivery of U.S. made airplanes, as well as the U.S. restricting the sale of certain chips to China, are indicative of the ongoing tensions. It might take longer for both sides return to the negotiating table.
• Interaction between China and other major economies: While the U.S. encourages its trade partners to negotiate, China is also actively seeking support from other major economies. In recent days, Chinese leaders have been actively negotiating with EU and ASEAN markets to strengthen trade ties. In previous years, Chinese companies invested into these regions to expand their overseas capacity as a way to circumvent U.S. tariff barriers. By doing this, Chinese companies have also brought capital, technology, skills and management experience, particular to the ASEAN region. This makes it very difficult for those markets to implement trade restrictions against China in exchange for favorable treatment from the U.S., which also implies sustained risks in the coming 90 days.
• Chinese domestic policies: If China is unable to reach an agreement with the U.S., it may need to rely on further fiscal stimulus to offset the shocks on demand. Politburo members are meeting at the end of April to discuss key economic policies. At the meeting, the Chinese government might announce a larger fiscal package to support consumption, and service sectors might be a new priority. Meanwhile, social welfare expenditure, including fertility support and rural healthcare, might also be increased. Real estate policy is a wild card, as the Chinese Premier recently highlighted the importance of this sector. The Chinese government might increase the scale of urban redevelopment to create incremental demand and reflate the economy. 

The People's Bank of China recently allowed more elasticity in the CNY exchange rate, which may indicate a shift in its priority from currency stability to domestic easing. As growth pressures rise, more aggressive monetary easing measures might be announced to support government financing and boost asset prices.

Investment implications

Driven by risk-off sentiment, the Chinese stock market declined quickly after the U.S. tariff announcement. Thereafter, the market stabilized when the national team started to buy. In addition to market sentiment and regulatory intervention, the Chinese stock market may find support from some fundamental factors amid trade uncertainty. As shown in Exhibit 1, machinery and high-tech products accounted for nearly 50% of Chinese exports in 2023. Behind this are comprehensive and resilient manufacturing supply chains, which are difficult to substitute. Meanwhile, Exhibit 2 shows that Chinese listed companies’ exposure to the U.S. market is way below their peers in Japan, South Korea and Taiwan.

The low exposure of Chinese public companies to the U.S. market may be a long-term supportive factor. Additionally, leading Chinese manufacturers possess advantages in cost, supply chains and technologies, which could enhance negotiation power and mitigate trade risks. Overall, we still see Chinese equities as a crucial part of asset allocation, given the importance of diversifying equity allocation globally amid heightened market volatility. Potential policy stimulus may also support long-term technological development and benefit the broader economy over the long run.

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