How Trump-Proof is China’s Economy?

China’s economic outlook faces fresh scrutiny after US President Donald Trump announced a new 10% tariff on Chinese imports to the US last week. Markets will be keeping a close eye on the National People’s Congress (NPC) meeting, a week-long gathering which starts tomorrow and where officials set economic priorities and spending plans, for a response to the new levies as well as plans to stimulate domestic demand.  

Trump’s latest announcement has not changed our view on the potential for material uplift in earnings expectations (more on why we’re quite sanguine about tariffs further down), putting us at odds with many in the market. Sentiment has been poor for some time, with investors quick to discount several positive developments, including a clear signal from Beijing last September acknowledging economic challenges and pledging decisive action in 2025. As we said at the time, Beijing marches to its own tune. 

History shows that markets reprice well before growth catalysts fully materialise and waiting for total clarity risks leaving investors behind. Here are four reasons for our continued optimism: 

• China needs both cyclical support and structural reform to shift from its traditional investment-led growth model to one driven by domestic consumption, with a focus on boosting household spending and increasing the gross domestic product (GDP) contribution of lower-income groups. We believe structural reform will be the catalyst that drives China’s new growth cycle and a shift in investor perceptions. However, the specifics will take time to emerge as policymakers assess the implications of Trump’s return to office
• China’s DeepSeek has managed to upend the orthodoxy of AI economics, paving the way for a faster and more affordable rollout of AI inference demand. For investors that may mean shifting technology exposure downstream to target the next wave of beneficiaries in AI's evolution. Post-DeepSeek, the prospect of lower-cost, more accessible AI further enhances this view. These recent developments suggest a potential rebalancing among the key building blocks of AI, a trend that will disproportionately benefit Asia's technology sector
• The region is more insulated from the impact of Trump 2.0. Even after the most recent announcements we are still a long way off the 60% touted by Trump pre-election. China has significantly reduced its reliance on the US (from almost 20% at the end of 2018 to just below 15% at the end of 2024) by diversifying supply chains and cutting bilateral trade exposure. Moreover, Trump appears to be more transactional than his predecessor and has surrounded himself with business leaders with first-hand experience of trade interactions in the region. In recent weeks, we have seen far closer ties emerging between companies in both regions (e.g. according to news reports, Alibaba will create a device system that can analyse and modify artificial intelligence models for users of Apple devices in China, while Baidu will be responsible for visual intelligence and other functions). We also remain optimistic about the prospects for a closer trade relationship, which does sit at odds with the prevailing market view

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• There is also a possibility that Trump 2.0 may prove less inflationary than initially expected, challenging assumptions of a stronger dollar and its impact on Asia. Markets were quick to price in in a shallower Federal Reserve cutting cycle after the presidential election, driving a nearly 10% rally in the US dollar exchange rate by late January. However, this trend has begun to reverse, as investors increasingly view tariff uncertainty as a drag on growth. If this materialises, the dollar has plenty of room to depreciate, potentially benefitting the entire region which historically outperforms on dollar weakness. In this case it would give the region’s central banks, including the People’s Bank of China, room to continue their own cutting cycles, adding to tailwinds

At first glance, Trump’s tariffs may cloud the outlook, but there are many conditions in place for a material shift in Chinese equities’ earnings expectations. It may take time for all the policy specifics to emerge, but we have seen in the past that waiting for total clarity risks missing a significant part of a rally.

All data is sourced from Bloomberg unless otherwise stated.

With contributions from  Nick Wilcox, Managing Director, Discretionary Equities and Chris Litchfield, Associate, Investment Services, Man Group.