Is China's Economic Stimulus Strategy Helping its Ailing Markets to Recover?

Last year saw China attempt to tackle its struggling economy head-on with the help of a series of stimulus packages targeting growth. But with problems mounting and the specter of a Trump Presidency looming in the US, is the government's stimulus enough for a sufficient recovery? 

Chinese leader Xi Jinping has been buoyant about the nation's recovery prospects in recent weeks. In December, Xi announced in a keynote speech the Chinese economy is both stable and making progress, while economic, social, and development goals and tasks were on course for success. 

Xi also stated that the Chinese government's policy in 2025 will be focused on boosting consumption with the help of a moderately loose monetary policy and a more active fiscal policy. 

Notably, Xi has suggested that the Chinese economy will grow by 5% in 2025 despite fears over the prospect of US President-elect Donald Trump's tariffs hurting the nation's exports. 

The reception to Xi's positive outlook has been mixed, with Morgan Stanley noting that the stance reflects China's ‘most aggressive stimulus tone in a decade' while also acknowledging that its implementation will be crucial. 

Without a clear plan, China's markets remain in a state of flux. While Chinese stocks have traded higher in the wake of the government's stimulus package announcement, they've failed to generate any momentum for further growth. 

Rhodium Group estimates suggest that China's GDP growth in 2024 fell well below its targets, improving between 2.4% and 2.8%. However, the think tank believes that China could still post growth of between 3% to 4.5% over the year ahead depending on its stimulus strategy. 

So, should investors look to China's discounted stocks ahead of an expected recovery? The answer lies in balancing optimism and harsh realities. 

The Arrival of Stimulus

The October announcement that China would shift towards a series of supportive policy measures to support its ailing economy brought a flurry of optimism to domestic markets. As a result, Chinese stocks recorded their largest jump in 16 years. 

However, since its October 8, 2024, peak, the CSI 300 Index (SHA: 000300) ended the year 7.55% down on its previous high in the wake of the announcement, suggesting that enthusiasm for the stimulus package is waning. 

What form has China's stimulus strategy taken? Focusing on lowering the cost of borrowing, the People's Bank of China (PBC) cut interest rates on existing mortgages by 0.5 percentage points and lowered the level of reserves banks must set aside before making loans in a bid to increase new lending. 

According to PBC governor, Pan Gonsheng, restrictions of borrowing for investments in stocks and shares on Chinese exchanges would see fewer restrictions. 

The measures saw both the Shanghai Composite Index initially embark on a rally while Brent crude oil prices also increased more than 1% at the prospect of fresh productivity from the industrial powerhouse. 

But the months that followed have seen optimism over the success of the measures weaken amid fears that the strategy isn't strong enough to deliver sufficient growth, particularly amid the return of the famously China-sceptical Trump. 

Will China Recover in 2025?

Following Trump's re-election in November 2024, there were fresh fears that China wouldn't simply need to focus on domestic growth, but its government would have to protect against the threat of severe declines in exports to the US. 

According to Goldman Sachs research, the impact of tariffs will be significant for China. At present, we don't know what the extent of Trump's tariffs will look like, but with the President-elect's promise to place an additional 10% tariff on Chinese imports, it's clear that 2025 will see fresh hurdles impact growth. 

Although Goldman Sachs estimates suggest that stimulus could partially offset the impact of tariffs in 2025, the Chinese economy is likely to decelerate to 4.5% from 4.9% in 2024 in a forecast that echoes Rhodium Group's projections for the year ahead. 

The figures forecasted by Goldman Sachs anticipate a 20 percentage-point increase in the effective tariff rate imposed by Trump, so investors must monitor the early movements put into place by the incoming administration. 

Worryingly, National Bureau of Statistics data has claimed that factory activity growth has failed to generate any meaningful momentum for China in the months following its stimulus announcement. 

According to the nation's official purchasing managers' index, December's rate of 50.1 missed Reuters' expectations of 50.3 for the month. The data also shows that manufacturing activity had fallen from November's 50.3 and aligned with October's 50.1. 

As a result, the available data for the final month of December suggests that to meet its GDP targets, China's stimulus strategy must become more aggressively growth-focused to fully avoid the impact of Trump's tariffs. 

Could Investors Pick Up Discounted Stocks?

There's certainly a high level of risk associated with Chinese stocks today, but for institutional investors that believe in China's growth potential should its stimulus measure pick up, there may be some low-cost opportunities with improved prospects in a strengthening economy. 

However, China Beige Book Analysts have suggested that foreign observers appear more convinced about the upside of China's pledged fiscal spending than domestic firms are. This misalignment of optimism could point to the value of taking more caution and optimizing risk management solutions before buying into Chinese stocks in Q1 2025. 

Instead, it appears that most wise institutions would benefit from looking more to the US than to China for the tariff implications on Chinese trade. In the geopolitical landscape of 2025, it's likely to be the Trump administration that has a major say in China's long road to recovery.

On the date of publication, Dmytro Spilka did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer. Dmytro Spilka does not intend to make a trade in any of the securities mentioned above in the next 72 hours.