China Economics_ 2025 Outlook_ Navigating Turbulence

Industry or Company Involved - China's Economy Key Points and Arguments 1. China's Economic Outlook in 2025 hinges on two factors: external tariffs and domestic stimulus. The US tariffs are expected to phase in from 25Q2 and increase by 15% in a staged manner, impacting China's exports and GDP. Domestic policy is expected to become more expansionary, but not a decisive shift from the current real-growth-targeting and reactive easing mode. 2. Tariff Risks: The baseline assumption is a 15% annualized increase in tariffs, similar to the 2018-19 trade dispute. The US has indicated a desire to strengthen oversight on tariff evasion, but implementation may be challenging due to China's dominant role in global manufacturing. 3. Trade Diversion: The US has indicated a desire to strengthen oversight on tariff evasion, and we do anticipate meaningful measures to close such "loopholes" through third countries and a crackdown on de minimis shipments. Implementation, however, may prove challenging, given China's dominant role in global manufacturing. 4. Impact of Tariffs: A 15% tariff hike with partial diversion will slow China's exports by -6.0% and China's GDP by –1.0% ceteris paribus. 5. RMB Depreciation: The RMB depreciation pressure is real under tariff threats. Amid trade dispute 1.0, USDCNY responded to almost every announcement of tariffs and deals. Based on this sensitivity, USDCNY could reach 7.7-8.0 under 60% tariffs, and in the escalating stage, the markets could price in extreme scenarios. 6. Confidence Problem: Two years after reopening, social confidence is still weak. The confidence issue appears broad-based and entrenched now. Weak sentiment would continue to weigh on the economy in 2025. 7. Deflation Challenge: China's longest streak of deflation drags on. The GDP deflator should remain negative in 24Q4E, the seventh consecutive negative reading. This is unprecedented for China, with a similar episode only in 1998-99. 8. Policies: China should and probably will navigate the turbulence with policy stimulus. The support would step up to offset potential tariff shocks, but not to reflate the economy. 9. Monetary Easing: Rate and RRR cuts will likely continue. The monetary policy stance is now officially stated as "moderately loose" by the Politburo and the CEWC. 10. Fiscal Policy: We expect overall government deficit to increase ~RMB2.5tr to RMB11.5trn for 2025. The central government could take up all the increase. 11. Targeted Consumer Support: Targeted consumer support would likely top policymakers' priority list for 2025. Following the recent pay hikes for civil servants, more mini measures could come through. 12. GDP Growth: We maintain our forecast that GDP growth could retreat to 4.2%YoY in 2025E after hitting 5.0% in 2024E. 13. Inflation: China may not find an easy way out of deflation in 2025E. We forecast CPI to average 0.6%YoY and PPI to decline -1.9%YoY in 2025E – no reflation. 14. Consumption: Retail sales could grow only 3.5%YoY in 2024E, setting the stage for rebound. Indeed, household savings rate stood at 38.0% in 24Q1-3, still notably higher than the pre-Covid 36.2%. 15. Investment: Property investment could record a fourth high single-digit or double-digit contraction in 2025. Policymakers are aiming for "stopping the decline of the sector and foster a stabilization," yet we think it is more about home prices and sales, instead of investment. 16. Trade: Exports look set to decline from the all-time high amid tariff uncertainties. Headline exports likely grew 5.4%YoY in 2024 with the momentum for volume even stronger. 17. Key Risks: The shock could be more significant especially in the case of a 60% universal tariff on China. Our current expectations are at best an educated guess, and we see risks largely balanced around this base case.