Hang Seng Index Forecast For 2025: US Tariffs and China’s Fiscal Policies in Focus

Executive Summary

China’s economy slowed in 2024 due to a collapse of the real estate sector, leading to a sharp deterioration in consumer sentiment and spending.

Despite the economy’s shortcomings, Beijing remains optimistic about achieving 5% growth. Han Wenxiu, Executive Director of the Office of the Central Committee for Financial and Economic Affairs, made the comments in late December.

Notably, the Hang Seng Index is on target to end 2024 in positive territory. Beijing’s stimulus measures have countered US tariff threats, potentially ending a four-year losing streak. 2025 could be a pivotal year for the Index, which sits at 19,721, well below its all-time high of 33,484. China will be the key driver in 2025.

This article explores China’s current macroeconomic environment, key challenges and opportunities, and the potential effects on the Hang Seng Index.

Current Economic Context: Macroeconomic Indicators

GDP Growth Trends

China’s GDP expanded by 4.6% in Q3 2024, slowing from 4.7% in Q2 2024. However, fresh stimulus measures in September and October are likely to have a positive effect on the economy. In December, Beijing announced further stimulus measures aimed at boosting consumption and broader domestic demand.

Targeting domestic consumption and demand will be crucial for China to meet its 5% growth target.

Inflation Rates

Retail sales increased by 3.0% year-on-year in November, down sharply from 4.8% in October. This trend aligned with rising deflationary pressures, suggesting weakening demand.

China’s annual inflation rate dropped from 0.3% in October to 0.2% in November, while producer prices continued to reflect price pressures amid lackluster demand. Nevertheless, China has avoided a deflationary environment since March, offering optimism as stimulus measures take effect.

Unemployment Rates

China’s unemployment rate remained steady at 5.0% in November, suggesting some stabilization. Continued declines in unemployment, supported by government policies, could improve consumer confidence and spending.

Industrial Production Trends

The last piece of the economic picture is industrial production and trade terms. Industrial production steadied in Q4 2024, recovering from significant slumps in March and August. China’s manufacturing sector remains a key contributor to the economy, underscoring the importance of production trends.

Increased domestic and overseas demand will also be pivotal for China to meet its 5% growth forecast for 2025. The manufacturing sector contributes over 50% to China’s GDP.

External Economic Pressures

US-China Trade Relations

US-China trade relations will be crucial for China’s economic growth prospects in 2025. President-elect Donald Trump threatened 10% tariffs on Chinese goods, though markets consider this less severe than previous warnings of 60% tariffs.

The incoming US administration may have a change in strategy for China. In December, Trump appointed ex-US Senator David Perdue as the Ambassador to China. Perdue previously lived in Hong Kong and worked in China, well-positioned to improve US-China relations. While Trump’s early moves suggest a desire to improve US-China relations, BRICS remains a potential stumbling block.

In September, Trump warned nations against abandoning the US dollar with threats of 100% tariffs on their goods. China is a crucial advocate of BRICS’s plans to shift away from the greenback.

Tariff Impact Assessment

The Chinese economy will likely feel the effects of US tariffs on goods heading to the US. S&P Global expects 10% tariffs to slow China’s economy to just 4.1% GDP growth in 2025. Economists expect a US-China trade war to also impact the labor market, wages, consumer confidence, and domestic consumption.

Deteriorating US-China relations would place greater emphasis on China’s domestic economy. This highlights the importance of effective policy measures to boost consumer confidence and consumption.

For perspective, S&P Global predicts China’s economy would grow by less than 2% if Trump imposed 60% tariffs on Chinese goods.

Global Economic Sentiment

Global economic sentiment has deteriorated since Trump’s election victory. Fears of global protectionism have intensified. There are also concerns about the potential of the US and China completely decoupling.

A US-China trade war and decoupling would have ramifications on the broader global economy. US tariffs on Chinese goods could make export-based economies more competitive in the US, potentially benefiting from increasing foreign direct investment (FDI).

However, demand from China would likely weaken, and China may flood the global markets with its goods, increasing competition while depressing prices.

There is also the threat of a US economic slowdown, which would further exacerbate global trade terms. Demand for Chinese goods could deteriorate as economies attempt to boost domestic demand to counter weaker global demand.

Consumer Sentiment Analysis

Improvement Crucial

Consumer confidence remains fragile, falling near record lows in September. The downward trend in consumer confidence impacted consumption and domestic demand, contributing to slower economic growth in Q3 2024.

Consumer Sentiment Index rose modestly in October, with consumers potentially responding to Beijing’s stimulus measures. However, uncertainty over US tariffs and the effectiveness of Beijing’s policies weigh on sentiment. Looking ahead, consumer confidence trends will be crucial in driving consumption.

Retail Sales Trends

Retail sales mirrored consumer concerns, declining throughout 2024. Accounting for around 40% of China’s GDP, a sharp pickup in consumer spending could highlight the effectiveness of Beijing’s stimulus measures in driving domestic consumption to counter the effect of US tariffs.

Private consumption’s contribution to China’s GDP is low relative to most economies, where consumption contributes between 60-70% of GDP. Historically, Beijing placed a greater emphasis on industrial production and infrastructure investment, with China’s economy considered a more export and investment-driven model.

Transitioning toward a more consumption-driven economy could mitigate trade war risks. However, the government would need to address key barriers to stronger consumer sentiment. These include:

• Weak real estate market.
• Youth unemployment rate. (16.1% in November).
• Consumer sentiment.
• Economic uncertainties.

Addressing these issues will be critical to boosting confidence and spending.

Fiscal Stimulus Measures

Beijing introduced a series of fiscal and monetary policies between September and December to bolster the economy. These included:

• Loosening monetary policy to lower local government debt costs.
• Allowing the yuan to weaken to counter US tariffs.
• Announcing a nationwide private pension program to improve household income stability.
• Increasing the budget deficit to 4% of GDP in 2025 to support growth.

Potential Economic Stimulus Impact

Expected GDP Growth Acceleration

Economic projections are mixed. However, stimulus measures could help China achieve its 5% growth target if domestic consumption rebounds.

Job Creation Potential

Increased domestic demand could boost job creation, potentially reducing youth unemployment rates. However, the national unemployment rate would need to fall to pre-Covid levels (< 4%) to sustainably restore consumer confidence and fuel consumption.

Higher unemployment rates would further impact consumer confidence and spending, potentially slowing economic growth.

Scenario Analysis

Optimistic Scenario

China’s economy expands by more than 5%, driven by successful stimulus and improved US-China relations.

Real estate sector reforms and an improving labor market boost consumer confidence and spending. This would facilitate a transition away from an export-driven and investment-driven model.

Conservative Scenario

China’s economy will expand by between 4% and 5%. US tariffs on Chinese goods impact trade terms, while US-China tensions affect consumer confidence and consumption. Beijing’s policy measures to boost consumption gain modest traction, leaving the economy dependent on production and exports.

What Does This Mean for the Hang Seng Index?

Easing threats of a US-China trade war, with dialogue aiming to improve ties would support a Hang Seng Index move toward October’s high of 23,242.

Effective fiscal and monetary policy measures, driving domestic consumption and economic growth exceeding 5%, could send the Hang Seng Index toward February 2022’s high of 25,051.

However, punitive US tariffs and weak domestic consumption could pull the Hang Seng Index toward October 2022’s low of 14,597.