China stock market outlook 2025: policy risk and tariff threats

The days of China dominating the economic panorama are numbered. The economy has matured, with phenomenal growth giving way to strong but more pedestrian expansion; the workforce is shrinking; the population is ageing; and the leadership has gone out of its way to make powerful enemies overseas.

China has for many years sought to expand in the Pacific, claiming islands well away from its shoreline in order to grab oil reserves with scant regards for neighbouring countries. It has angered the environment lobby and antagonised nations most vulnerable to global warming by building coal-fired power stations at rapid pace.

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The clampdown on free speech in Hong Kong, in direct contravention of guarantees given when the former British colony was handed over in 1997, has cast serious doubts about whether it is safe to do business there. China is taking the risk of destroying Hong Kong’s carefully built status as a trade and financial link with the West.

China has been building links with the developing world through its Belt and Road initiative and will gain some tangible benefits from these expensive overseas investments, but these are investments being ploughed mainly into impoverished nations that do not have the middle-class consumers needed to take products from Chinese factories.

Finally, it is China that will face the brunt of tariffs imposed by US President Donald Trump. Although he may well step back from making friendly nations suffer, he will have least compunction in dealing with China.

It is true that the West is heavily dependent on Chinese production of computer chips and some rare earth metals. It will not be possible to replace these quickly, but the move to reduce dependence on China is under way.

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Domestically, China will continue to suffer from the long-term impact of its policy of limiting families to one child, a policy that has been abandoned gradually, belatedly and reluctantly over the past 15 years without the hierarchy admitting to the disastrous effects that the severe curtailment of reproduction has had on demographics.

Just as it took time for the full impact of limiting couples to one son or daughter to work through into the working-age population, so it will take at least another generation to reverse the effects, although the Communist Party leadership is making clumsy attempts to persuade couples to procreate.

China’s population peaked at nearly 1.4 billion in 2022, some seven years after the Chinese Communist Party officially proclaimed that having two children per couple was permissible. Now three is allowed, two is desirable, as officials try to control the birth rate according to party policy rather than what couples want or can afford.

This change of heart in government is almost certainly too late to stop China’s population falling even faster than in affluent Western democracies. A United Nations study predicts that China’s population will fall below 800 million by the end of this century. There seems to be no contraceptive more effective than affluence and Chinese women, enjoying the effects of belated comparative prosperity, are choosing to marry later and have fewer children rather than willingly turn their backs on consumerism.

The number of births in China last year at nine million was just over half the number recorded in 2016 immediately after the two-child allowance was introduced. To merely replace the existing population, the average number of children born to each woman needs to be about 2.1 to allow for infant mortality. The fertility rate this year will probably turn out to be only one.

The demographics of China have come into focus since the millennium as economic growth has tailed off slowly but surely. The double-digit surge towards the end of the 20th century was always unsustainable as the Chinese economy matured, and the International Monetary Fund (IMF) calculates that the figure is down to around 5%, with a further slippage to 4.5% likely next year.

While the IMF has a pretty dismal record on GDP growth forecasts, it could well be spot on this time. The world’s second-largest economy grew 4.7% in the second quarter and 4.6% in the third. Analysts point to weak domestic demand, a struggling housing market and sluggish exports.

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A stimulus package was launched in September but it may prove to be too little, too late. So much in the Chinese economy is a closed book to overseas commentators that there are serious doubts about the size of the package.

The People’s Bank of China claimed this was the biggest stimulus package since the pandemic, with cuts to interest and mortgage rates and a planned $112 billion (£88 billion) boost for the stock market. However, the bank admitted that it would take time to produce results.

Hobson’s choice: Invest in China and Chinese companies at your peril. It is surely better to look at Japan, India, South Korea and even Taiwan, despite Chinese threats to force reunification.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.