• Temporary US-China tariff truce has helped lift China markets
• More severe risk scenarios for the Chinese economy have receded
• Stimulus package potentially delayed but remains on the cards for 2025

China’s market recovery

The China A-share market, as represented by the CSI 300 index, is 2.5 percent higher than it was at the start of the year, and about 5.0 percent higher than April’s low.

As seen below, the market started a concerted recovery in early May, even before President Trump announced his temporary tariff truce. However, the truce announcement on 12 May further boosted the market’s recovery, with some profit-taking along the way.

Fig 1: CSI 300 Index YTD

Source: Bloomberg, as of 23 May 2025

Positive 3Q outlook

As we enter the third quarter, we are shifting to a more positive view of the China market for the following reasons:

1. No trade decoupling

A complete decoupling between the US and China now appears highly unlikely, even after the 90-day reprieve. We acknowledge that trade negotiations between the two countries are extremely challenging with many outstanding issues. As such, the 90-day timeline could be extended. However, we do not see either country having the stomach for a re-escalation of tariffs.

2. Upgraded economic forecast

We expect considerable market relief that the threats to China’s economy posed by US tariffs have now been dialed down. Previously, economists had highlighted the potential for large scale lay-offs from China’s manufacturing sector, which would have impacted the population’s domestic consumption power. These same economists are now upgrading their China GDP projections to between 4.0 and 4.5 percent.

3. Lower US trade deficit

Assuming the current arrangement lasts i.e. 30 percent US tariffs on Chinese goods and 10 percent China tariffs on US goods, we would expect the US-China trade imbalance to reduce in 2025. Additionally, it appears that China may agree to buy more US agriculture and energy. A weaker dollar could also make US imports more attractive for Chinese businesses and consumers. A lower US trade deficit with China could help to partially mend US-China relations.

4. More trade diversification

China is focused on diversifying its range of trading partners, especially for the import of key goods. To date, China has struck deals to source more oil from Canada, agriculture from Brazil, and beef from Australia. China is also seeking to deepen its export relationships with Europe, Mexico, Japan, South Korea and ASEAN. The trade war sparked by President Trump has accelerated China’s shift away from the US as a key trading partner.

5. Potential for more stimulus

Investors had expected the Chinese authorities to announce a substantial stimulus package in response to the trade war. We think the current reprieve could delay this announcement by two or three months in order to reassess the full impact of the tariff reset on domestic consumption trends. Nevertheless, we don’t think that a stimulus can be delayed indefinitely if China is to reach its 4.5 to 5.0 percent growth target for 2025.

Room for more upside

Fig 2: 2025 equity valuation forecasts for select Asian markets

Source: UOBAM, Bloomberg, May 2025

China equity valuations remain reasonable and are among the lowest in Asia. While overall, Chinese companies’ earnings growth potential in 2025 is lower than the Asia average for 2025, we think this belies substantial areas of strength. The recent Contemporary Amperex Technology (CATL) listing on the Hong Kong exchange, alongside recent fund raising efforts by BYD and Xiaomi suggest that certain key sectors such as EVs have the potential for strong expansion in the months and years to come.