SUMMARY
- US-CHINA: Trump’s initial light touch with China increases the likelihood that Beijing will announce only modest stimulus at the National People’s Congress in March
- TECH: DeepSeek’s achievements have limited implications for the broader narrative on China
- PROPERTY: Beijing will step in to stabilize embattled developer Vanke, but macro headwinds will continue to challenge a recovery for the sector
- GROWTH: Local government spending will provide temporary support for activity, but underlying demand remains weak
China’s Lunar New Year holiday started on Tuesday, with local markets reopening on February 5. In this report we round up key issues on the minds of investors and China’s leaders heading into the holiday, and our thoughts on the market implications. See also our 2025 macro outlook for China (link HERE), released last week.
US-CHINA: Trump’s initial light touch increases risk of underwhelming stimulus support from Beijing
While hardly breathing easy, China’s leadership will be satisfied that it has accomplished its initial goals of managing Trump risk.
First, Beijing has re-established the personal channel between Trump and Xi. The two have spoken twice since Trump’s election. Trump continues to speak positively about Xi and is interested in visiting China.
Second, the two sides have thus far avoided flashpoints over sensitive foreign policy issues, particularly Taiwan. China’s senior diplomat and Secretary of State Marco Rubio held a call on January 24. According to Beijing, Rubio said that the US does not support Taiwan independence and hopes that the Taiwan question can be resolved peacefully in a way acceptable to both sides of the Strait. Whether Rubio actually said that is unclear, but it does seem as though the Trump administration is thus far not inclined to break with traditional US policy on the Taiwan issue. This does not mean we should expect sunshine and roses: Beijing’s readout implied that Wang warned Rubio to “behave himself,” and Rubio remains under China sanction since 2020. But thus far both sides are observing a tense status quo.
Third, Beijing has interested Trump enough in a potential trade deal to at least postpone heavy tariffs. Trump has announced a 10% increase in China imports starting February 1, citing Beijing’s insufficient cooperation in cutting off exports of fentanyl precursors. But Trump has thus far struck a much lighter tone than his campaign promises to hike tariffs on imports from China by 60%. This may be partly due to interest in what Beijing has to offer on a revised trade deal, but it could also reflect a determination by Trump and his team to put together a developed strategy on China. Beijing is well aware of a raft of internal reviews of trade policy – many of them focused on China – that Trump has tasked out to his team with a due date of April 1.
Market implications: China’s leadership knows it is not out of the woods with Trump. We would regard it as highly optimistic to assume that China will avoid significant tariffs on its exports to the US. But the timing is important. As our 2025 China outlook report noted (link again HERE), Beijing aims to announce only as much stimulus as necessary to accomplish its growth goals. The fact that Trump is not moving aggressively on China tariffs increases the likelihood that Beijing will only announce modest stimulus support at the National People’s Congress in early March. This will put Beijing in catch-up mode in the middle of the year, as growth slows – especially if Trump ends up imposing tariffs by then. Investors will have a long summer wait to see if Beijing plusses up stimulus in H2.
TECH: Nvidia’s DeepSeek pain is China’s limited gain
DeepSeek’s release of a high-performing, low-cost reasoning model knocked $600 billion off Nvidia’s market cap on Monday. While China’s markets were already closed for the holiday on Tuesday, there are reasons to think that Nvidia’s pain will not directly translate to China’s gain.
To be sure, DeepSeek’s success is a notable development. It shows that clever design – incentivized by lack of access to high-end US chips – can lower the cost of training even the most advanced AI models. This represents at least a short-term confidence boost for China’s tech sector. It should also be good news for the global economy – and maybe even Nvidia in the long-term – by spurring AI diffusion.
But there are major caveats to concluding that DeepSeek’s achievement will shift the broader investment narrative around China.
First, lack of access to chips is still a major constraint – for DeepSeek and for China. DeepSeek founder Liang Wenfeng told Chinese premier Li Qiang last week that the US blockade on high-end chips to China is still DeepSeek’s major bottleneck. DeepSeek’s success may thus be less of a true “Sputnik moment” than a repeat of Huawei’s short-term PR coup in designing a 7-nanometer chip despite US export controls. That is, DeepSeek is thus far keeping pace with US competitors, but may have trouble (like Huawei has) continuing this pace as its peers move on to more advanced models powered by more sophisticated chips. For China’s tech sector as a whole, the need for chips to deploy AI – that is, for inference and not just training – will also be an ongoing constraint in competition with the US. The ultimate goal for Beijing is to find domestic substitutes for Nvidia chips, but that remains a major long-term challenge.
Second, DeepSeek does not validate China’s industrial policy strategy. As much as Beijing would like to take credit for DeepSeek, the company’s achievements were highly idiosyncratic. Liang started DeepSeek as a side project of his quantitative hedge fund for the purpose of basic research and without major requirements to show a return on investment to shareholders or policymakers. To the extent that Beijing helped, it would be – ironically – by cracking down on quant funds and helping spur Liang’s outside interest.
Third, DeepSeek’s success will have an uncertain impact on US policy. President Trump referred to DeepSeek’s achievement as a “good thing” by lowering the cost of AI. At the same time, some China hawks in the US tech and national security circles will argue that the US must now move even more aggressively to tighten China’s access to Nvidia chips. Trump may not heed those calls, given fierce lobbying by Nvidia and other chipmakers as well as cloud firms such as Oracle. It is even possible that Trump will be amenable to the chip industry’s calls to loosen export controls, arguing that this would boost sales to fund R&D while reducing China’s incentives to create home-grown substitutes. But the key point is that creating a perceived “Sputnik moment” in the US can produce unintended consequences for China. Huawei’s high-profile success with its 7 nanometer chip led the US to tighten semiconductor controls even more dramatically.
Fourth, DeepSeek will not help China’s macro outlook where it matters most – the lack of demand. Even the tremendous growth of electric vehicles and renewables has not been enough to lift the broader economy out of deflation. Tech simply cannot fill the hole created by the property correction, a weak labor market, and modest stimulus. AI will boost productivity, but not help with the deflationary pressures that are the main drag on growth and on domestic equity markets.
PROPERTY: Vanke treatment shows Beijing is focused on financial stability
Vanke, one of China’s largest property developers, reshuffled its board on Jan 27. The new chairperson of the board – who will also be its legal representative – is from a local state-owned firm. This is a strong indication that the Chinese authorities will intervene to stabilize finances at the distressed developer. Vanke is unlikely to default on its public debt, at least in 2025.
Support for Vanke is in contrast with Beijing’s hands-off approach to developer defaults in the past four years. And it is consistent with our view, highlighted in our outlook report, that Beijing will make financial stability the top priority for this year.
While a positive step, we expect only a marginal impact in reviving property sales and investment. Most private developers have already defaulted on their bonds, limiting the confidence boost coming from Vanke. Developer defaults are only one of several factors that have driven Chinese households to buy existing apartments rather than new apartments. Other impediments include concern over the quality of new housing, and administrative price floors imposed by local governments that keep prices too high.
More broadly, macro fundamentals are still not favorable for a property recovery. Deflation, high real interest rates, and weak household income growth will constrain demand for housing this year.
A potential game-changer would be signs that Beijing is prepared to use the central government’s financial resources to implement a comprehensive stabilization plan – such as buying up excess housing inventory – rather than leaving this as the responsibility of cash-strapped local governments.
GROWTH OUTLOOK: PMIs highlight weakness in private demand
How does the economy look as China’s heads into Lunar New Year? On January 17, Beijing announced GDP growth for Q4 2024 (5.4% y/y) and full-year 2024 (5%) that beat estimates. This presents a “good news is bad news” problem. The strong headline numbers will reduce the sense of urgency among China’s leadership to increase policy support. But the end-year performance was boosted by transitory factors (including a front-running of export orders to avoid tariffs), while underlying domestic demand remained quite weak. Household spending was anemic, the property rebound showed signs of losing steam, and unemployment rose.
The official PMI readings for January, released on Sunday, show that soft demand remains a problem in the new year. The manufacturing PMI came in at 49.1, compared to the Bloomberg consensus of 50.1. The non-manufacturing PMI (services and construction) was a larger disappointment at 50.2, compared to the consensus of 52.2, underscoring the weakness of consumption activity and the property sector.
For all the talk of stabilization, China’s recovery is still heavily dependent on stimulus. In the near term this will not be a problem. We expect local government spending to ramp up in mid-February (after the holiday), representing a front-loading of fiscal stimulus this year. This will provide short-term support to activity in February and March. But given that we expect only a modest stimulus announcement at the March NPC, that support – and overall growth momentum – will fade during Q2.
We will be watching for signs of health in household spending and property investment during the Lunar New Year but expect the trend to remain subdued.
