China’s Consumption Economy: Can Stimulus Counter Rising Tariffs?

From Production to Consumption: Was December’s Exports One Last Hoorah?

In December, China reported a combined value of imports and exports surpassing CNY 4 trillion, a landmark moment in China’s trading history. Exports and imports rebounded at the end of 2024, one month before Trump’s January 2025 inauguration.

Markets attributed the surge to front-loading as investors anticipated more US tariffs on Chinese goods under the incoming Trump administration. December’s trade data could lead to more US tariffs as the US-China interest rate differential continued widening, favoring the US dollar. A weaker CNY has enhanced the price competitiveness of Chinese goods, potentially mitigating the impact of tariffs.

On Monday, January 13, East Asia Econ, a research service specializing in the markets and macro of China, Japan, Korea, and Taiwan, stated,

“China – even without tariffs, CNY can get to 7.7. CNY has started to move this year, but it isn’t clear that the currency is yet pricing in tariffs. The sharp fall in onshore rates has further widened the spread with US yields, and that gap alone points to CNY rising towards 7.7.”

East Asia Econ attributed the jump in exports and the trade surplus to a weaker CNY, stating,

“But one is the weakness of the CNY, which in real terms is as cheap as 2014. And what’s the likely market reaction to a second round of Trump tariffs? Push the CNY cheaper still.”

While a weaker CNY is a plausible outcome to US tariffs, potentially bolstering demand, Trump may impose more punitive tariffs. On his campaign trail, he had initially threatened 60% tariffs before pledging 10% tariffs.

This raises the bigger question: is Beijing shifting its focus toward a consumption-driven economy?

Expert Views on China’s Economic Transition

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero recently highlighted challenges in China’s economic model:

“In the November data you had industrial production, value-added production, growing even higher than in October, with retail sales growing at only half that of production. So, what are you going to do with all of this production? Who are you going to export to? The problems are probably becoming more acute because protectionism is on the rise and China is not changing its model. I think 2025 is time for change, and China needs to change very soon, or the year might end up quite badly.”

China’s Transition to a Consumption Economy

Rising protectionism that analysts predict will intensify during Trump’s second term as US President may be contributing to Beijing’s economic rethink.

People’s Bank of China Governor Pan Gongsheng attended the Asian Financial Forum, sending a clear message. Beijing will target household income, social security, and subsidy support to boost consumption, saying,

“The priority of macroeconomic policy should shift from promoting more investment in the past, to promoting both consumption and investment, with more importance attached to consumption.”

In December, Beijing pledged stimulus measures to boost consumption and broader domestic demand. China’s President Xi Jinping also gave assurances that China will accomplish the 14th Five-Year Plan and implement more proactive and effective policies.

One key component of the 14th Five-Year Plan was the implementation of frameworks to expand domestic demand effectively and boost consumer spending. The Plan runs from 2021 to 2025. However, household spending still accounts for less than 50% of GDP, well below the Asia-Pacific average.

For context, household spending contributions to GDP in 2023 were:

• Central and West Asia: Over 60%.
• East Asia (including HK and China): Around 40%.
• South Asia: Over 60%.
• South East Asia: Over 50%.

However, Beijing faces several challenges in boosting household spending, including youth unemployment (16.1% in November) and low consumer sentiment. These complicate efforts to increase household spending.

Mainland China’s Market Outlook

Uncertainty about China’s economic outlook has weighed on Mainland China’s equity markets in early 2025.

The CSI 300 Index is down 3.31% year-to-date in 2025 after climbing 14.68% in 2024. Similarly, the SSE Composite Index has fallen 3.78% in January after gaining 12.67% in 2024. Both Indexes made their gains in the third quarter of 2024, ahead of the US Presidential Election.

Hong Kong-listed stocks have also struggled, with the Hang Seng Index down 4.59% year-to-date after jumping 18% in 2024.

Increasing US-China tensions and a lack of meaningful stimulus targeting consumption could materially impact demand for HK and Mainland China-listed stocks. However, robust stimulus measures and improving US-China relations could fuel a 2025 HK-China market rally.

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