The China Briefing
Tariffs and technology
Given all the tariff noise, China markets have been notably stable
Please find below our latest thoughts on China:
- Despite much of China being on holiday and, indeed, on the move – over 500 million people travelled domestically during the Lunar New Year period1 – there has been no shortage of news. Tariffs and technology have been very much in the headlines.
- Given all the recent events, China’s markets have been notably stable since reopening. The offshore H-shares index is up 2.8% so far this week, and the onshore CSI 300 index up 0.7%.2
- To briefly recap – Washington and Beijing have been exchanging tariff volleys in recent days.
- President Trump fired the opening salvo, imposing 10% additional US tariffs on all Chinese goods. And when these tariffs took effect, the Chinese government announced a combination of retaliatory measures.
- Despite this, our view is that China is signalling restraint in the hope that a deal can be negotiated.
Chart 1: 2024 performance of China onshore and offshore equity markets ytd (USD, rebased to 100)
Source: Bloomberg, Allianz Global Investors, as at 5 February 2025.
- There has been a distinct contrast to the experience in 2018 when Mr Trump first imposed tariffs on China. Back then, the US imposed 25% tariffs on USD 50 billion of Chinese goods, and China responded like-for-like, with 25% tariffs on USD 50 billion of US goods.3
- This time around, China’s response has been to put tariffs on just USD 14 billion of US goods. This compares to the US tariffs on USD 525 billion of Chinese goods.4
- Another factor is that China officials did not allow the renminbi to depreciate when markets reopened this week. The PBOC’s daily “fixing” rate for the renminbi was nearly unchanged from the level before the Lunar New Year holiday.5
- This suggests a different playbook than the previous tit-for-tat strategy.
- The future path of the US-China trade conflict remains highly uncertain. However, our base case is to expect the longer-term impact of Trump 2.0 on China’s equity markets to be more muted the second time around.
- Fundamentally, many companies have taken action to mitigate the impact of tariffs, often by relocating manufacturing facilities outside China. And, as China’s recent response shows, they appear to be more prepared and better coordinated this time around.
- Given China has a lot to lose from a trade war – its exports to the US (USD 525 billion) are much higher than imports from the US (USD 164 billion)6 – Beijng’s response to higher tariffs will likely be through domestic stimulus. With exports expected to slow, there is a need to boost domestic demand to maintain the recent economic momentum.
- There should be more details soon. The National People’s Congress (NPC) will open on 5 March, and announcements will include both this year’s GDP target – expected to be around 4.5-5.0% – as well as information on key economic policy.
- One outcome of the geopolitical tensions in recent years, specifically the sanctions imposed by the US which restrict access to high-spec technology hardware, has been for China to focus intensively on becoming more self-reliant in strategic industries.
Chart 2: DeepSeek vs ChatGPT
Source: DeepSeek, ChatGPT, as at 5 February 2025.
- In this context, it may well be that DeepSeek has achieved its success exactly because of US sanctions rather than despite the sanctions.
- As the saying in English goes, necessity is the mother of invention. And while there are many unanswered questions about DeepSeek’s model, nonetheless this does appear to be a very significant innovation in China’s software development capabilities, narrowing the perceived technology gap with the US.
- Given the open-source approach used by DeepSeek, the global developer community at large can inspect and further improve the software. And the resultant availability of AI tools for application developers should be a significant net positive for AI proliferation, both in China and around the world.
- There is, of course, no direct way to invest in DeepSeek. However, as an immediate proxy, we see China’s large-cap internet stocks as likely beneficiaries, with the market potentially placing higher valuations on their AI-related activities.
- Over time, we expect to see more rapid development of AI in a wide range of applications – from humanoid robots and autonomous driving to numerous different software uses.
1 Source: Goldman Sachs, 6 February 2025
2 Source: Bloomberg, 6 February 2025
3 Source: Goldman Sachs, 5 February 2025
4 Source: Goldman Sachs, 5 February 2025
5 Source: Bloomberg, 5 February 2025
6 Source: Macquarie, 3 February 2025