Iris Fan, Portfolio Manager, Asia Equities
The US-China trade war has seen so many twists and turns over the past few months that it would be surprising if you are not completely confused about what is happening.
Here is a quick recap.
| US trade policy | Effective date | Tariff rate | Tariff Details |
| Section 301 | 27 Sept 2024 | 25% | Set in place during since Trump’s first term |
| “Fentanyl” tariffs | 4 March 2025 | 20% | Raised from 10% imposed on 1 February |
| Liberation day | 2 April 2025 | 34% | Tariffs on China, alongside other countries |
| Reciprocal tariffs | 10 April 2025 | 125% | Imposed on China under IEEPA |
| Trade truce | 14 May 2025 | 10% | 90-day reprieve from the 125%, bringing baseline tariffs to 30% |
| Trade deal | 5 June 2025 | No details | Details not disclosed |
Despite these back and forth measures, the China market has been unexpectedly resilient. Since hitting a low on 7 April, China’s CSI 300 index has risen by about 10 percent, and is up by about 4 percent year-to-date.
Tariff scenarios
But with the pause on Liberation Day tariffs coming to an end next week, there is potential for the China market to turn volatile again. So, what is the likely tariff outcome for China?
- The best-case scenario points to a 10 percent universal tariff, similar to the terms of the US-UK trade deal. However, given the many geopolitical rivalries between the US and China, this seems unlikely.
- The worst-case scenario could see China face at least a 55 percent levy on US exports. This is after factoring in legacy Section 301 tariffs, fentanyl-related penalties, and the universal baseline.
- Our base case, once the dust has settled, is for US tariffs on China to range between 35 to 55 percent.
In our view, the worst of the US-China trade war is behind us. While market volatility is likely to persist given the challenges of striking a conclusive trade deal, there is now greater clarity on the potential tariff outcomes for China.
Moderate growth
At these tariff levels, we think China’s 5 percent GDP growth target for 2025 remains within reach. In fact, China looks set to deliver to this target in the first of the year.
GDP for the first quarter came in at 5.4 percent, and economic growth in the second quarter is also on track to hit between 5 and 5.5 percent. Export front loading was of course a major driver, but the government’s targeted retail stimulus, particularly for household appliances, plus steady investment in infrastructure and manufacturing upgrades also contributed to the country’s 1H growth.
However, challenges remain. The economy has not yet been able to shake off its deflationary pressures, weighed down by manufacturing overcapacity and sluggish consumer demand. At the same time, intense competition and the resulting price wars are eroding profit margins across multiple sectors.
Positive on dividend paying stocks
Against this backdrop, we maintain a neutral view on Chinese equities. We recognise that broad-based momentum in the China A-share market may be subdued in the near term as investors grapple with trade and deflationary uncertainties.
During this time, we think equity outperformance will depend on active stock selection. We favour high-dividend sectors such as banks, utilities, and telecoms, which continue to attract insurance flows and offer defensive yield. It is even better if, alongside their high dividends, these companies are able to demonstrate strong fundamentals, pricing power, or can benefit from policy support.
AI remains a key theme
We also anticipate continued upside in AI supply chain stocks. It is hard to see any let-up in the structural demand for AI. But on top of this, the Chinese government appears to be re-focusing on the development of tech enterprises as a way to drive innovation and new economic growth. As a result, the private sector is being looked upon more favourably than in the past few years.
Furthermore, despite US export controls on advanced semiconductors, companies like Deepseek demonstrate that China is closing the AI technology gap faster than expected.
Muted consumer recovery
We think the Chinese government will want to let the tariff situation play out before taking any major policy decisions. As such, we would not expect a large-scale stimulus package to be announced in the second half of 2025. This means that policies designed to boost consumption will likely remain reactive rather than pre-emptive for now.
However, we see incremental support for housing, alongside continued subsidies for trade-in programs and equipment upgrades. Sectors benefiting from these subsidies, such as household appliances, should continue to see solid sales. We also favour new consumption themes, particularly those aligned with shifting consumer preferences. “Emotional” rather than “functional” consumption, and China-chic, seem to be very much on-trend.
Summary of our base case views
| Tariff | Economy | Tech & AI | Consumer demand |
| Expected to range between 35% to 55% | On track to achieve GDP growth target of “around 5%” | Continued upside in AI supply chain stocks |
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