China’s government has recently introduced new economic packages to try to boost the economy, but will it be enough to woo investors as the potential risks posed by global trade tensions loom large?
As China steps into the spotlight with its New Year’s celebrations (Year of the Snake) starting on the 29 January, some may be wondering about the country’s potential investment opportunities. There will no doubt be hopes that the Year of the Snake will repeat the Year of the Dragon’s (2024) performance, where the MSCI China - an index of China’s large and medium sized companies by market cap - gained just over 19.8% in local currency.1 This is a stark contrast to 2023, the Year of the Rabbit, where the market fell by 10.9%1.
Of course, it’s important not to look at China’s performance in the short term. Indeed – even its long-term record is no guarantee for future performance. As the chart below shows, comparing the MSCI AC World index with the MSCI China index, over the last ten years Chinese equities have been volatile and have lagged global stocks as the rest of the world recovered from the Covid pandemic and subsequent lockdowns, but China did not.
China’s economy achieved a growth rate of 5% in 2024 (although foreign experts calculate a lower number2), meeting its target despite facing various challenges. However, this was the country’s slowest growth rate since 1990 (excluding the pandemic years). Growth is expected to slow further in 2025 to around 4.5% as the focus shifts to domestic consumption. This area of China’s economy has struggled in 2024 as record low consumer confidence and pent-up demand (following pandemic induced lockdowns) waned. Retail sales growth slowed from an annual rate of 7.2% for 2023 to 3.3% in September.3
Deflation has been a concern for the Chinese leadership and investors in recent years. The economy is characterised by chronic overproduction with many sectors suffering from overcapacity, poor profitability and persistent underconsumption, with households saving too much and spending too little. This puts pressure on prices, driving them down and impacting corporate earnings.
In September, China’s producers marked their second year of deflation. Deflation can be dangerous, potentially leading consumers to put off spending in the hope that prices will be cheaper in the future. This impacts growth - further weighing on consumer and business confidence.
At the same time the Chinese currency, the yuan, has been getting weaker against the US dollar. Usually, deflation should increase the value of a currency (as it did in Japan), but the yuan fell around 15% since March 2022, reducing Chinese consumer’s purchasing power to buy foreign products by a sixth.4
China’s population, which once supported the country’s growing economy, is now a significant headwind. 22% of the population are over the age of 60 and this is expected to rise to 30% by 2025. The effects of the one child policy, which began in 1980, are beginning to impact China. Unlike with developed nations China has little social security which means that the older population either cannot retire or are dependent on their children, which impacts disposable income for the next generation. There is a risk that China gets old before it gets rich.
To address the slower growth rate, lacklustre stock market performance, weak consumer confidence, demographic headwinds and deflationary threat, economic stimulus plans were introduced in September 2024.
These could make China harder to ignore, especially if they help revive its economy, boost consumer confidence and support the stock market. They go further than others have done in the past but there are still several headwinds that could impact China’s economic growth including its ongoing property sector crisis and potential trade tensions with the United States.
China is an important market to consider. However, as with any investment it’s good to remember that the value of investments and the income from them can go down as well as up and you may get back less than you invest. Here we unpack China’s stimulus policies and examine the merits as well as the risks of investing in it in 2025 and beyond.
Key measures included:
A key threat to China is the potential for the United States to reignite trade wars through the imposition of tariffs on imports. President Donald Trump, during his election campaign, proposed universal tariffs of 10-20% on all imports, with up to 60% on Chinese imports. In his first few days in office President Trump has indicated he is considering a 10% tariff on all Chinese goods.
The impact on China could be significant, potentially leading to further currency devaluation. A worst-case scenario from a new trade war could see lower global growth and lingering inflation as the benefits of free trade and labour market mobility diminish.
However, this could be a ploy ahead of striking bilateral trade deals. Trump, known for his deal-making mentality, may use the threat of tariffs to extract favourable concessions on US imports or encourage foreign firms to set up manufacturing facilities in the US to boost jobs.
Evelyn Partners’ Chief Investment Strategist, Daniel Casali, wrote in his November 2024’s Investment Outlook: “Stronger global growth could well encourage a broadening in investor risk appetite for previously unloved areas of the market, such as Chinese equities”.
Overall, we are neutral across Asia and emerging markets. While China’s stimulus measures could support its stock markets in the short term, we believe structural problems persist, weighing on our outlook for the country longer term.
We prefer countries like India, as it can offer investors diversification away from China. For more insights, see our analysis on ‘China’s challenges and India’s rising appeal’.
If you have any questions about China and other emerging markets, please speak to your usual Evelyn Partners adviser, book a complimentary consultation online or call us 0207 189 2400.
Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI's express written consent.
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