China - Beijing prepares for a (delayed) US tariff snakebite

On 29 January, the Lunar Year of the Snake will start, just after the inauguration of Donald Trump as 47th US president. While the economy is entering 2025 on a bit stronger footing following Beijing’s policy pivot and trade frontloading, a rise of US import tariffs under Trump 2.0 would form an additional headwind. We expect Beijing to keep adding monetary easing and fiscal support aimed to stabilise real estate and domestic demand, and offset the tariff impact.

The Chinese economy enters 2025 stronger, but supply-demand imbalances remain

Recent macro data confirm that the economy picked up in late 2024, in line with our expectations, driven by the policy pivot from September and trade frontloading in the run-up to higher US import tariffs. Real GDP accelerated to 5.4% y/y in Q4 (Q3: 4.6%), meaning the 2024 growth target (5%) was exactly met. However, the pick-up in quarterly growth was less pronounced (1.6% q/q s.a.), with upward revisions in Q3 and Q2. Regarding the monthly data, the December PMIs showed a clear pick-up for services, driven by construction (see here). Exports and industrial production data for December came in strong on the back of trade frontloading. There are also some signs of improvement on the demand side. Retail sales picked up to 3.7% y/y in December (but slowed in monthly terms) and residential home sales are now for three months in a row higher than the same month one year earlier (see chart). That said, China’s recovery is still imbalanced, with the supply side clearly stronger than the demand side, and consumption, private investment and confidence fragile. This is mirrored by ongoing low CPI inflation and producer price deflation. Activity data for early 2025 will show the usual volatility due to annual changes in timing of the Lunar New Year holiday break.

More support is being rolled out; Beijing uses playbook regarding US tariff threat

In line with our base case, Beijing is stepping up stimulus to support real estate and domestic demand. At the Central Economic Work Conference (CEWC) held in December, ‘to comprehensively expand domestic demand’ was declared the main policy goal for 2025. The monetary stance was shifted from ‘prudent’ to ‘moderately loose’. On the fiscal front, Beijing confirmed its readiness to raise the headline budget deficit (from 3% of GDP) and to issue more ultra-long central government bonds and special local government bonds. The CEWC statement also hinted on more direct support for consumption (see our comment here). And indeed, earlier this month, programmes for consumption and and industrial equipment subsidies were expanded. We expect more fiscal stimulus under a stepwise approach, allowing Beijing to finetune support with developments in activity/sentiment, while keeping part of its powder dry for when more is known about Trump’s tariffs. US tariffs will be made contingent on studies of tariff policy/trade relations, with Trump adding a 100% tariff threat should China not cooperate with a TikTok deal and a 10% threat per 1 February (fentanyl). Beijing is already using parts of the tariff playbook we sketched in our 2025 China outlook. One of them is currency depreciation (CNY lost ±2.5% vs USD since Trump’s re-election), but the PBoC is keeping this from getting disorderly by setting the fixing relatively strong (chart). The currency angle will likely impact the timing of further monetary easing, but we still expect additional policy rate cuts (a bit more than in 2024) and RRR cuts going forward.