China Seeks Wiggle Room for Growth in Year of the Snake

China’s efforts to steer between domestic and international growth challenges in 2025 could be good for bond investors.

China’s growth outlook for 2025—the Year of the Snake in Chinese astrology—is overshadowed by slowing global activity, domestic headwinds and a new wave of tariffs on the country’s exports to the US. Policymakers have taken action to support growth, and we expect them to do more. In our view, the potential for further easing is positive for fixed-income investors.

Despite continuing problems in its real estate sector, China met its 5% growth target for 2024. But the circumstances in which it did so reflect the challenges facing the economy. The target was met largely because of supportive policy actions late in the year that, together with an increase in export demand, resulted in higher growth momentum in the fourth quarter.

Exports and industrial manufacturing investment (much of it linked to export demand) were the main drivers of growth over the full year, but the fourth-quarter boost to exports had an ominous undertone. Much of it came from a front-loading of demand in anticipation of the tariffs to be imposed on China’s exports to the US by the new Trump administration.

With global growth expected to continue slowing in 2025, China’s prospects depend heavily on how policy actions will mitigate the impact of tariffs and other headwinds. On balance, we think that there is enough leeway for around 4.5% growth. For fixed-income investors, China’s low inflation and the likelihood of further policy easing create, in our view, a potentially attractive opportunity.

The Tariff Challenge

We believe US tariffs will be negative for China’s export growth, but their impact is likely to be less severe than during the first Trump administration when, in 2018–2019, they cost China 1.5% of GDP. Since then, China has diversified its trading relationships, so that the US now accounts for 40% of China’s trade balance compared to 80% in 2018, and 14.5% of its exports compared to 20% (Display).

Full implementation of the proposed tariffs of 60% would still be painful for China, but it would also likely be inflationary for US businesses and consumers. For that reason, it would make sense for the US to phase in tariffs gradually—as appeared to be the case in January, when President Trump announced that he intends to impose a 10% tariff on Chinese-made goods beginning February 1.

Our research indicates that tariffs of 20% in 2025 could shave 0.5% off China’s GDP growth, but that policy actions would largely offset the effect.

All Hands to the Policy Pump

China’s current challenges have resulted in policymakers taking unusual and more coordinated actions. The need for a change of approach was brought home by the extent to which the continuing slump in the property market was undermining consumer confidence and retail sales. The change is positive, in our view, and may bode well for policy effectiveness.

In late 2024, for example, the People’s Bank of China (PBOC) broke precedent by lowering its policy interest rate and the reserve requirement ratio (RRR)* on the same day, by the size of the cuts, and by providing forward guidance for a further rate cut. The policy rate and capital requirements were lowered by 20 and 50 basis points respectively, compared to the more usual 10 and 25 basis points.

More targeted measures include help to two areas of fixed-asset investment (FAI)—the once-dominant real estate sector (in the form of lower mortgage rates and downpayment requirements) and infrastructure (by allowing local governments to issue debt on more favorable terms). Manufacturing, helped by export demand, led FAI activity during 2024 (Display).

Consumers have been targeted through a subsidized goods trade-in and equipment upgrade program, while investors have gained support through measures to stimulate the equity market, including a RMB300 billion (US$41 billion) loan facility for share buy-backs. Banks stand to benefit, too, from RMB1 trillion of special government bonds to fund their recapitalization.

Policy Outlook Supports Bonds

We think more easing will be needed to support growth this year. While we expect the PBOC to lower the policy rate and RRR further, the type and timing of more targeted measures may be determined by the government’s wish to stay flexible until it has a better understanding of which industries are likely to be most affected by the US tariffs.

But in our view, the overall direction of policy, together with a competitive RMB exchange rate, points to the likelihood of 4.5% growth in 2025.

We regard the policy outlook as positive for Chinese government bonds. While total government debt issuance is likely to be higher than in 2024, market fundamentals—including, in the absence of credit growth, the appetite for bond purchases among banks—are supportive. Assuming no external shocks (such as higher-than-expected tariffs), we see scope for 10-year yields to rally further.

*The reserve requirement ratio is the percentage of deposits that banks must hold in reserve.