US-China trade relations will be crucial for China's economic growth prospects in 2025. President-elect Donald Trump threatened 10% tariffs on Chinese goods, though markets consider this less severe than previous warnings of 60% tariffs.
The incoming US administration may have a change in strategy for China. In December, Trump appointed ex-US Senator David Perdue as the Ambassador to China. Perdue previously lived in Hong Kong and worked in China, well-positioned to improve US-China relations. While Trump's early moves suggest a desire to improve US-China relations, BRICS remains a potential stumbling block.
In September, Trump warned nations against abandoning the US dollar with threats of 100% tariffs on their goods. China is a crucial advocate of BRICS's plans to shift away from the greenback.
The Chinese economy will likely feel the effects of US tariffs on goods heading to the US. S&P Global expects 10% tariffs to slow China's economy to just 4.1% GDP growth in 2025. Economists expect a US-China trade war to also impact the labor market, wages, consumer confidence, and domestic consumption.
Deteriorating US-China relations would place greater emphasis on China's domestic economy. This highlights the importance of effective policy measures to boost consumer confidence and consumption.
For perspective, S&P Global predicts China's economy would grow by less than 2% if Trump imposed 60% tariffs on Chinese goods.
Global economic sentiment has deteriorated since Trump's election victory. Fears of global protectionism have intensified. There are also concerns about the potential of the US and China completely decoupling.
A US-China trade war and decoupling would have ramifications on the broader global economy. US tariffs on Chinese goods could make export-based economies more competitive in the US, potentially benefiting from increasing foreign direct investment (FDI).
However, demand from China would likely weaken, and China may flood the global markets with its goods, increasing competition while depressing prices.
There is also the threat of a US economic slowdown, which would further exacerbate global trade terms. Demand for Chinese goods could deteriorate as economies attempt to boost domestic demand to counter weaker global demand.
Consumer confidence remains fragile, falling near record lows in September. The downward trend in consumer confidence impacted consumption and domestic demand, contributing to slower economic growth in Q3 2024.
Consumer Sentiment Index rose modestly in October, with consumers potentially responding to Beijing's stimulus measures. However, uncertainty over US tariffs and the effectiveness of Beijing's policies weigh on sentiment. Looking ahead, consumer confidence trends will be crucial in driving consumption.
Retail sales mirrored consumer concerns, declining throughout 2024. Accounting for around 40% of China's GDP, a sharp pickup in consumer spending could highlight the effectiveness of Beijing's stimulus measures in driving domestic consumption to counter the effect of US tariffs.
Private consumption's contribution to China's GDP is low relative to most economies, where consumption contributes between 60-70% of GDP. Historically, Beijing placed a greater emphasis on industrial production and infrastructure investment, with China's economy considered a more export and investment-driven model.
Transitioning toward a more consumption-driven economy could mitigate trade war risks. However, the government would need to address key barriers to stronger consumer sentiment. These include:
Addressing these issues will be critical to boosting confidence and spending.
Beijing introduced a series of fiscal and monetary policies between September and December to bolster the economy. These included:
Economic projections are mixed. However, stimulus measures could help China achieve its 5% growth target if domestic consumption rebounds.
Increased domestic demand could boost job creation, potentially reducing youth unemployment rates. However, the national unemployment rate would need to fall to pre-Covid levels (< 4%) to sustainably restore consumer confidence and fuel consumption.
Higher unemployment rates would further impact consumer confidence and spending, potentially slowing economic growth.
China's economy expands by more than 5%, driven by successful stimulus and improved US-China relations.
Real estate sector reforms and an improving labor market boost consumer confidence and spending. This would facilitate a transition away from an export-driven and investment-driven model.
China's economy will expand by between 4% and 5%. US tariffs on Chinese goods impact trade terms, while US-China tensions affect consumer confidence and consumption. Beijing's policy measures to boost consumption gain modest traction, leaving the economy dependent on production and exports.
Easing threats of a US-China trade war, with dialogue aiming to improve ties would support a Hang Seng Index move toward October's high of 23,242.
Effective fiscal and monetary policy measures, driving domestic consumption and economic growth exceeding 5%, could send the Hang Seng Index toward February 2022's high of 25,051.
However, punitive US tariffs and weak domestic consumption could pull the Hang Seng Index toward October 2022's low of 14,597.