China’s Q4 Growth: Stimulus Success or Trade Surplus Illusion?

China’s Economy under Scrutiny as Tariffs Loom

It is another crucial week for the global markets as traders eye the world’s two largest economies. On one side, Trump’s looming inauguration has heightened concerns over tariff-related risks. On the other, Beijing is grappling with a transitioning economy, aiming to shift from an export-led model to one driven by domestic demand.

Economic data from China on January 17 will give insights into the impact of recent monetary policy and stimulus measures. Economists predict China’s economy expanded by 5% year-on-year in Q4, up from 4.6% in Q3 2024. 5% growth would align with Beijing’s target and suggest that stimulus measures have bolstered the economy.

However, economists may also attribute this growth to the surge in China’s trade surplus. China’s trade surplus soared from $104.84 billion in December, up from November’s $97.44 billion surplus. The value of imports and exports exceeded CNY 4 trillion for the first time.

Market speculation suggests front-loading ahead of US tariffs, raising concerns about the sustainability of growth under escalating trade tensions.

Can China Move Away from an Export-Led Economy?

On January 17, the International Monetary Fund (IMF) will present its 2025 economic projections. The IMF could give insights into the potential effects of US tariffs and China’s progress toward a consumption model.

S&P Global projected that 10% tariffs could slow China’s economy to 4.1% in 2025, with a sharper decline under higher tariffs.

While Beijing has pledged stimulus to boost domestic demand, meaningful measures remain limited.

The People’s Bank of China (PBoC) Governor Pan Gongsheng recently underscored the need to prioritize consumption, stating,

“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.”

On January 15, CN Wire reported news of China implementing a trade-in policy for mobile phones, tablets, and smartwatches from January 20. The move could be the first step in many to boost consumption.

However, economists have raised concerns about China’s economic outlook and the need to change the economic model. Natixis Asia Pacific Chief Economist Alicia Garcia Herrero commented on China’s challenges to shift to a consumption economy. She stated:

“Xi Jinping’s ideological opposition to European-style “welfarism” is among the reasons that China is locked into its state-subsidised, export-led industrial model. It’s not so easy to boost domestic demand. They would need to radically change their economic model.”

Inflation, Retail Sales, and Unemployment: Crucial Data Points

China’s December inflation figures highlighted the difficulties in boosting consumption. The annual inflation rate slowed from 0.2% in November to 0.1% in December.

Garcia Herrero remarked on the December inflation numbers:

“China’s economic slowdown has been accompanied by increasingly pronounced and prolonged deflationary pressures. The latest release of inflation data for December 2024 confirms this concerning trend, driven by the lack of domestic demand.”

Upcoming unemployment and retail sales figures on January 17 will give further insights.

A marked rise in retail sales and lower unemployment could paint a rosier outlook. However, consumer sentiment remains weak. In November 2024, sentiment dropped to near all-time lows, suggesting more meaningful measures are needed to boost confidence. Without this, China’s economy remains exposed to US tariffs and global protectionism.

Mainland China’s Market Outlook

Market fears of a US-China trade war and a slower transition to a consumption economy have impacted Mainland China’s equity markets. The CSI 300 is down 3.38% in January 2025 after rallying 14.68% in 2024. The Hang Seng Index has mirrored Mainland China’s trends, falling 3.07% in January after advancing 17.67% in 2024.

While consumer sentiment remains weak, upbeat economic data could offer temporary market relief. However, US tariff developments and China’s domestic consumption trends will be crucial.

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

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