China’s Economic Outlook Wavers: PMI Weakness and Trade Tensions Dominate

China’s Economic Challenges Deepen Amid Looming Tariffs and US Tariff Uncertainty

On January 27, the National Bureau of Statistics released January’s private sector PMIs. The numbers were underwhelming, with China’s broader industrial sector contracting for the first time in four months. Non-manufacturing sector PMI data also raised concerns about the shift toward a consumption-driven economy.

Research firm East Asia Econ remarked on the PMI data, stating:

“China – not very informative. Data today don’t help in understanding the cycle. PMI headlines softened, but that isn’t unusual when Chinese New Year falls in January. The details didn’t drop in the same way, but also don’t look strong. Separate data for industrial profits did improve, but that isn’t a reliable data series.”

January’s PMIs coincide with the prospect of US tariffs on Chinese goods effective February 1. US President Trump has flip-flopped on tariffs, initially threatening 10% tariffs. However, Trump backtracked on January 23, stating his preference to avoid using tariffs on China.

The shift in Trump’s tariff stance came despite rising exports and falling imports widening China’s US trade surplus to $361 million in 2024.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero noted,

“China is the most well-prepared country for the Trump administration because it faces the largest exposure. It is initially clear that China is the winner as Trump is considering visiting the country in his first 100 days in office.”

Tariffs could strain US-China relations, with the risk of retaliation sparking a trade war and disrupting global trade flows.

DeepSeek Outpaces ChatGPT, Global Markets React Sharply

On January 27, DeepSeek, a low-cost Chinese AI platform, surpassed ChatGPT on Apple’s App Store downloads, triggering a market sell-off. The rise in popularity questioned the need for significant spending to roll out AI products.

US tech giants Nvidia (NVDA) and Broadcom Inc. (AVGO) tumbled 16.97% and 17.40%, respectively. The crypto markets also succumbed to the news, with bitcoin (BTC) falling to a session low of $97,768 before rebounding.

US President Trump’s initial response to the market reaction was subdued, reportedly saying,

“The release of DeepSeek, AI from a Chinese company should be a wakeup call for our industries that we need to be laser-focused on competing to win.”

However, the administration may use tariffs as leverage to support Silicon Valley. How China handles Trump’s rhetoric could set the tone for 2025.

US-China Relations Crucial for Consumer Sentiment

Meanwhile, US-China relations may also influence China’s consumer sentiment. A US-China trade war could initially drive nationalist sentiment, boosting demand for domestic brands. Under this scenario, Beijing’s consumption-targeted stimulus measures may bolster China’s economy.

However, prolonged tariffs may undermine consumer confidence, curbing discretionary spending and impacting the economy. Under this scenario, consumption-targeted stimulus could become less effective, exposing China’s economy to the global demand environment.

Conversely, stable US-China relations could boost consumer spending, supporting China’s transition to a more consumption-driven economy. Near-term unemployment trends could be crucial. January’s NBS PMI data may fuel concerns about job security. However, the upcoming Caixin PMI data will give greater insights into private sector conditions.

Alicia Garcia Herrero recently commented on China’s growth outlook, stating,

“China’s growth momentum might be sustained in the first three months of this year. This is partly because exports are expected to be strong as companies try to front-load shipments abroad to avoid new tariffs introduced by the incoming Trump administration. But uncertainties surround China’s export performance amid rising geopolitical tensions.”

Mainland China and Global Markets React

Economic uncertainty has weighed on China’s equity markets. The CSI 300 has fallen 2.99% in January, while the SSE Composite Index is down 3.02%.

Meanwhile, Hong Kong’s Hang Seng Index advanced by a modest 0.76% in January.

In contrast, global indices such as the DAX and the Dow have fared better, with gains of 6.90% and 5.10%, respectively.

These trends underscore the significance of US-China relations on China’s economic outlook and investor sentiment.

Looking ahead, China’s Caixin private sector PMI data and potential stimulus measures could prove pivotal. Weaker private sector activity and insufficient stimulus may fuel concerns about China’s economic outlook. US tariffs would exacerbate Beijing’s challenges, pressuring consumer sentiment and the economy further.

In January, Beijing announced its trade-in program for mobile devices and other electronics. Job security and consumer sentiment trends would be key to the effectiveness of such programs. Beijing’s focus on consumption stimulus aims to mitigate US tariff risks.

Explore expert forecasts on US-China trade and further insights into China’s economy, the Hang Seng Index, and global markets here.