China may better withstand Trump tariffs this time

Business Times

22-04-2025

THE global market has made a sharp downturn following the US's implementation of reciprocal tariffs. China has been hit the hardest, facing a blanket tariff rate of 145 per cent.
The MSCI China Index has since given up roughly three-quarters of its earlier gains, which were fuelled by investor enthusiasm around AI developments and renewed domestic stimulus measures. As at Apr 15, the index still recorded a decent year-to-date return of 6 per cent. Compared to other key markets, Chinese equities appear to be showing greater resilience during this downturn.
Patriotic sentiment driving support
China's 'fight-to-the-end' stance, with its retaliatory tariffs against the US, has resonated widely among its people. The extraordinarily high tariffs imposed on Chinese goods have thus unexpectedly helped accelerate the recovery of investor and consumer confidence; both were heavily damaged in recent years by political uncertainty and a sluggish economic outlook.
Expressions of anti-US sentiment have emerged across Chinese society, with calls to boycott American products and impose higher prices on US consumers in China. A surge in patriotism has encouraged many citizens to support the domestic equity market and increase consumption as a form of national solidarity, and many view the trade dispute not just as an economic challenge, but also as a shared national mission.
At the same time, China's state-backed funds have injected billions into state-owned enterprises, technology firms and exchange-traded funds to stabilise the equity market. Although state-driven capital injections have historically provided only short-term market support, they remain a crucial psychological boost. The message is clear: China is mobilising its resources and public resolve to confront and cushion the impact of trade pressures.
Tariffs a drag, but present economic opportunities
While public sentiment has been in China's favour during this round of tensions, the economic cost of the trade conflict remains significant. Despite Beijing's ongoing efforts to reduce its reliance on the US, a strategic shift initiated during the first term of US President Donald Trump in 2018, the US continues to be China's largest single-country export destination. Nevertheless, progress has been made. The share of Chinese exports destined for the US fell from 19.3 per cent in 2018 to 14.7 per cent in 2024.
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Based on our estimates, if the 145 per cent tariff remains in place, it could shave one percentage point off China's GDP growth this year.
To counter this, Chinese policymakers are actively strategising to fill the void left by the loss of US market access. One key approach is the acceleration of trade diversification efforts. China is expanding its network of trading partners and establishing new free-trade zones. In the week of Apr 14, President Xi Jinping embarked on diplomatic visits to three Asean countries – Vietnam, Malaysia and Cambodia – all of which face high double-digit reciprocal tariffs from the US. During his stop in Vietnam, 45 cooperation agreements were signed.
As trade tensions with the US escalate, we anticipate an increase in regional trade collaboration, especially given Trump's continued hardline stance. His negotiations with Vietnam and Europe have so far failed to generate significant progress, with mutual tariff removal seen to fall short of his 'phenomenal' deal standard. Should these talks fail after the 90-day suspension period, many countries will turn to alternative trade alliances, offering China a strategic opportunity to position itself as a more reliable partner and to build new economic coalitions.
China has launched several retaliatory measures as bargaining chips, including tariffs on US agricultural goods and the suspension of soybean import licences. Given that China accounted for roughly half of US soybean exports in 2024, this move is likely to inflict significant pressure on American farmers. To mitigate the shortfall, China has shifted its sourcing to Brazil. In addition, China restricted the export of rare earth elements, putting pressure on critical industries such as automotive, aerospace and defence.
In the meantime, we believe the key to sustaining economic stability lies in China's ability to pivot towards a more consumption-driven growth model. With inflation at -0.1 per cent year on year as at March 2025, real borrowing costs remain elevated at 3.2 per cent, leaving ample room for monetary easing. Additionally, further issuance of consumption vouchers, alongside ongoing programmes such as consumer goods trade-in incentives, is expected to help boost domestic demand.
Nonetheless, China faces persistent challenges in the labour market. The youth unemployment rate ticked higher in February, reflecting underlying weaknesses in job creation. In our view, restoring labour market confidence and improving household income will be essential to unlocking more sustainable, broad-based consumption growth.
Chinese equities still worth holding
Tariffs will inevitably weigh on China's economy, but under the current circumstances, the US is unlikely to escape unscathed either. Given the high degree of uncertainty surrounding the trajectory of tariff policies in the coming months, panic selling of Chinese equities may not be the wisest course of action.
China still holds several strategic cards in this standoff, and is actively deploying a multi-pronged approach to cushion the potential impact of trade losses. These measures include rerouting trade flows, imposing controls on strategic materials, implementing targeted stimulus, and tapping into a wave of national pride to bolster domestic demand and market sentiment.
Since the sharp sell-off in Chinese equities on Apr 7, signs of a rebound have already begun to emerge. Defensive, dividend-paying stocks, domestically focused businesses, and consumer discretionary names aligned with a consumption-driven economy are all well-placed to capture upside opportunities as sentiment stabilises.
The writer is a research analyst with the research and portfolio management team of FSMOne.com, the B2C division of iFast Financial, the Singapore subsidiary of iFast Corp