China’s post-pandemic recovery has been underwhelming, sparking comparisons to Japan’s stagnation in the 1990s. Growth in 2023 reached only 5.2%, marking one of the slowest paces since 1990, excluding Covid-disrupted years. In response, Chinese policymakers introduced broad stimulus measures in 2024, including rate cuts and fiscal incentives to support markets. At a recent policy meeting, Beijing pledged to boost domestic demand and increase fiscal spending through higher debt issuance to prepare for potential external challenges such as renewed trade tensions with the US. These developments will shape the China outlook for 2025 and beyond.

The International Monetary Fund (IMF) and the Asian Development Bank (ADB) expect China’s economy to slow further in 2024 and 2025, forecasting 4.8% and 4.5%, respectively. Some investment experts have similar or even worse forecasts. The new US administration under Donald Trump and the threat of tariffs are factors leading to a wide range of estimates on the impact of tariffs and China’s growth prospects.

“We expect China’s GDP growth to slow to 4.0% in 2025 and 3.0% in 2026, with the assumption that the US hikes tariffs on China’s exports starting in September 2025 and China would increase policy support in response,” says UBS in their China outlook. They note that stricter U.S. tech restrictions and intensified decoupling efforts could amplify downside risks, while faster structural reforms in China could strengthen domestic confidence and economic performance.

JP Morgan’s Asia Investment Strategy Team estimates a 60% tariff could lead to a 1-1.5 percentage point drag on economic growth over a twelve-month period. “Based on the experience of the last trade war, this could significantly reduce bilateral trade between the US and China. We estimate there will likely be a negative shock to economic growth through exports, investment, employment, and broader confidence,” the team says.

Pictet Asset Management suggests that under their baseline scenario of a 20% tariff, additional Chinese policy measures, supported by a weaker RMB, could largely mitigate the adverse effects of U.S. tariffs. However, if tariffs were to rise by an additional 60%, the impact might prove too significant to fully counterbalance. “We think there is decent probability the government may set a growth target at around 5% or with a range between 4.5%-5% for 2025.”

“Concerns about a prolonged trade war persist. However, government stimulus will be highly targeted, focusing on restoring trade and stock market balance,” notes Shasha Li Mafli, Fund Manager at Eric Sturdza Investments.

“With China’s increasingly diversified trade relationships and reduced reliance on the US, trade risks are likely to be mitigated. China’s authorities will do whatever is necessary, even if in smaller steps than many Western observers expect, to support markets and consumer confidence,” adds Mafli.

China Outlook: Equities

The outlook for China’s equity markets in 2025 presents a mixed but cautiously optimistic picture. JP Morgan’s Asia Investment Strategy Team notes that offshore Chinese equities face headwinds from tariff concerns and a stronger dollar, limiting upside potential. While a more aggressive fiscal response from Beijing could offset economic challenges, clarity on such measures is still awaited. “Overall, this backdrop is more supportive for onshore China relative to offshore China, but we retain a neutral view on both markets in 2025 for now,” the team adds.

Invesco’s Raymond Ma takes a more constructive view, highlighting the potential for substantial growth in Chinese equities as market expectations remain subdued. “As corporate fundamentals improve, we anticipate a reversal in top-line revenue and a reduction in the margin pressures that have persisted over the past three years. This may lead to a potential increase in return on equity and positive earnings revisions, enhancing investor sentiment. This recovery is expected to be supported by the ongoing stimulus measures,“ writes the Chief Investment Officer, Mainland China and Hong Kong.

Allianz Global Investors observes that Chinese equities responded positively in late November despite news of additional tariffs from the US, indicating that some risks may already be priced in. They maintain an optimistic stance, citing supportive government measures and reasonable valuations. AGI sees opportunities in “buying the dips” during market weaknesses, expecting stronger corporate earnings and broader economic support to underpin investor sentiment.

China Outlook: Bonds

As for China bonds, Manulife Investment Management expects China’s pro-growth policies to stabilise its credit markets and support GDP growth.

“We believe the authorities have clearly signalled that more forthright fiscal stimulus should be introduced in 2025,” says Murray Collis, CIO, Asia (ex-Japan) Fixed Income at Manulife IM.

“China’s credit markets are expected to trade in a relatively stable range going into year-end, especially given the relatively contained overall reaction to the U.S. election result,” he adds.

Collis maintains a positive duration view and expects the 10-year Chinese government bond (CGB) to range between 2.00% and 2.25% into year-end.

Pictet Asset Management keeps a similar view, anticipating that the 10-year Chinese government bond yield will rebound to 2.0% by the end of 2025, driven by fiscal policy and structural reforms. They caution that aggressive monetary easing could raise concerns about a ‘Japanification’ of China’s bond market.

This article was first published on AsiaFundManagers.com.