China - Navigating property challenges amidst ongoing US threats

After weak January PMIs, credit and LNY spending data provide some green shoots

Monthly activity data for China are a bit scarcer than usual at the start of each calendar year, as due to the Lunar New Year (LNY) break January/February data are combined and published in March. Looking at the data that are available, the January PMIs were disappointing, and did not match the picture of improving macro data seen in Q4-24 (see our comment here). Still, lending growth expanded stronger than expected in January, showing evidence that Beijing’s policy pivot from September 2024 is filtering through. Other moderately positive signals came from the tourism and spending data for the LNY holiday. On the inflation side, CPI remained low in January, but picked up in line with our expectations, climbing to a five-month high of 0.5% y/y (partly impacted by LNY spending). Producer price inflation remained in negative territory though, for the 28th month in a row, staying at -2.3% y/y.

Outlook still shaped by measures on stabilizing property and demand on the one hand

China-related market sentiment has improved in recent weeks, but this is driven more by tech enthusiasm (DeepSeek’s breakthrough, Beijing’s more lenient stance on job-creating internet platforms) than by macro developments. Looking through the volatility of the recent data, China’s recovery is still led by the supply side. The macro outlook will continue to be shaped in the first place by concrete measures aimed at breaking the negative feedback loop from property (to confidence/demand), with the recovery in new home sales looking short-lived so far. Beijing’s treatment of the large state-owned property developer Vanke is a key litmus test in this context. More broadly, we expect more clarity on Beijing’s ‘stepwise’ fiscal support stance (on top of what’s already been rolled out) to follow at the annual National People’s Congress in early March. On the monetary front, we still expect additional policy rate and RRR cuts (even a bit more than in 2024), although the timing thereof will likely be shaped by currency and other “tactical” considerations.

…and by US import tariffs and other trade and investment measures on the other

US president Trump recently hinted at a potential US-China trade deal. Note that China still has the largest bilateral trade surplus in goods with the US, but it is the only key US trade partner whose surplus has clearly fallen compared to the first tariff war in 2018-19. In our base case, we assume the US will raise China import tariffs by an additional 25% (on top of the 10% levied in February, and the ±10% already in place), to an average tariff rate of 45% by Q2-26. Should tariffs rise by less, this would shift the balance of risks regarding our growth forecasts (4.3% for 2025 and 4.2% for 2026) in a positive direction, but it may also mean that additional support from Beijing will be less. The US is currently studying its trade policies and trade relationship with China. The outcome of these studies could form the basis for further China-specific tariffs, while China may also be hit by future product-specific (but country non-specific) tariffs (see here). What is more, a recent US memorandum calls for new investment/trade restrictions on China. This includes a proposal to sharply raise fees on Chinese/Chinese-built ships visiting US ports to reduce China’s dominance in global shipbuilding, which may – if implemented in full – have material repercussions for global shipping.