China’s Economy Faces Headwinds Amid US Tariffs and Deflation Risks

US Tariffs, Inflation Risks, and Market Turmoil: What Investors Need to Know

Trade tensions are heating up as President Trump takes a hard-line stance on tariffs, imposing steep duties on aluminum and steel imports. With reciprocal tariffs looming, inflation risks are mounting, and markets are on edge. US sectors dependent on aluminum and steel imports could face rising costs, likely passing them on to customers.

President Trump could officially declare separate reciprocal tariffs as early as Wednesday, targeting countries that impose import duties on US goods. Trump stated:

“I may do it later on or I may do it tomorrow morning, but we’ll be signing reciprocal tariffs.”

Meanwhile, the latest US CPI Report, released on February 12, highlighted inflation risks. Core inflation rose from 3.2% in December to 3.3% in January, sinking bets on multiple 2025 Fed rate cuts.

A higher-for-longer Fed rate path may impact company earnings and consumer spending, which accounts for around 70% of US GDP.

The Kobeissi Letter assessed the potential impact of tariffs on US inflation, stating:

“And the ultimate wildcard is what tariffs will do to the inflation situation. As seen below, one-year inflation expectations are skyrocketing since the trade war began. We could see an average tariff rate of 20%+, the highest in 30 years. Inflation just got even hotter.”

A related chart shows a clear spike in expected US price changes over the next year, highlighting the potential inflationary impact of tariffs. However, it does not factor in additional punitive tariffs that may be imposed.

China’s Economic Outlook Remains Uncertain

While US tariffs pose risks to the US economy, China faces similar challenges. 10% US tariffs on Chinese goods took effect on February 4. While less punitive than Trump’s threat of 65% tariffs, these levies may impact the Chinese economy.

S&P Global recently forecast that China’s GDP growth may slow to 4.1% in 2025 if the US imposed 10% tariffs on Chinese goods. The US rating agency added that higher tariffs would likely lead to an even sharper slowdown.

Despite trade concerns, Beijing may feel temporarily relieved after recent consumption trends, potentially supporting an official 5% growth target for 2025.

Natixis Asia Pacific Chief Economist Alicia Garcia noted:

“On a more positive note, the Chinese New Year consumption data has been robust, showcasing the resilience of the economy. Specially, during the holiday period, bank card transactions, box office revenue, tourist numbers, and restaurant consumption all experienced robust growth.”

Beijing reinforced its commitment to boost consumption on February 10, with plans to focus more on driving consumption.

However, private sector PMI data raises concerns about the effectiveness of these efforts. January’s Caixin PMI surveys revealed that manufacturing and services sector firms are cutting jobs amid economic uncertainty. Furthermore, a continued deterioration in labor market conditions could pressure wages and consumer spending.

Commenting on China’s economic environment, García Herrero added:

“The (China’s) deflationary environment further echoes the weak investment in China, which does not bode well for investment growth, a critical driver of economic growth. This situation may ultimately lead to further contraction in employment and wage growth, undermining the sustainability of consumption growth.”

Fiscal and Monetary Policy Maneuvers Critical for Growth

Considering a potential US tariffs-driven slump in exports and deflation, Beijing’s fiscal stimulus maneuvers and the People’s Bank of China’s (PBoC) monetary policy decisions could prove pivotal in stabilizing growth.

Garcia Herrero concluded:

“So far, it appears that the Chinese government is poised to reaffirm the 5% GDP growth target for 2025, sustaining the momentum gained during the Chinese New Year and replicating its success in stabilize growth in 2025. As such, we have upgraded our forecast to 4.7% from 4.5% for 2025.”

Further stimulus and monetary policy moves could also coincide with the emergence of AI-driven opportunities, such as DeepSeek, which may bolster sentiment and consumption.

Market Trends: Mainland Markets Remain Cautious

Concerns about a US-China trade war have pressured mainland markets in early 2025. Year-to-date, the CSI 300 and the Shanghai Composite Index have declined by 0.23% and 0.09%, respectively. However, the Hang Seng Index has rallied 10.33%, fueled by AI-related gains in Hong Kong-listed tech stocks, with Alibaba (9988) soaring 43.45% in early 2025.

Trade Negotiations and Beijing in the Spotlight

Future progress on US-China trade talks will be crucial. A full-blown trade war could adversely impact China’s economy and efforts to boost domestic demand.

Ongoing risks to domestic consumption underscore the urgency of effective policy responses to mitigate the impact of US tariffs.

Stay ahead of market trends—explore our in-depth analysis of China’s economy and global markets here.