Q1 2025 Update from the Asia Trade Floor
Jingjing Huang: Hello and welcome to our Asia Trade Floor update with portfolio manager Stephen Chang. Today, we’ll be discussing the latest developments in China and what they mean for investors like you. Let's dive right in.
Stephen, the opening salvos of the renewed U.S.-China trade tensions have been fired. How will this impact the U.S. economy?
Stephen Chang: Indeed, an additional 10 per cent tariff across all Chinese imports into the U.S. came into effect on the 4th of February. China responded swiftly with tariffs of 10 to 15 per cent on targeted U.S. imports, as well as other measures.
We expect the U.S. tariffs on China will be durable, given the ongoing geopolitical tensions between the two nations, including issues around Taiwan, trade, intellectual property, and technology. We think the additional 10 per cent tariff on China will be less disruptive to the U.S. economy compared to those on Canada and Mexico, as the U.S. has fewer supply chain links and less domestic content in Chinese imports. The latest U.S. tariff announcement on aluminium and steel adds another wrinkle.
While the outcome is highly uncertain, we estimate that Trump’s tariffs – if fully implemented on China, Canada and Mexico – could raise U.S. inflation by 0.8 percentage points and reduce growth by 1.2 points in the first year. If just the Chinese tariffs are implemented, the economic effects on the U.S. would likely be much more muted: boosting inflation by roughly 0.2 percentage points, with a similarly sized negative impact on growth.
Jingjing Huang: What about China? How do the tariffs impact its macroeconomic outlook?
Stephen Chang: U.S. tariffs will put pressure on China’s already strained economic environment. China’s property market remains a significant drag on growth, and perhaps needs more policy support to turn around.
China has been reliant on an export-led growth model due to its weak domestic demand and property sector challenges. Therefore, it is likely to continue to ramp up monetary and fiscal programs designed to support its domestic economy.
Consumption, in fact, tops President Xi’s list of 9 economic priorities for 2025. To spur spending, for example, the government has plans to expand its consumer subsidy program to include electronics such as smartphones and tablets, as well as vehicles and home appliances.
Jingjing Huang: What about infrastructure and manufacturing, which have been helping to drive China’s growth in the past few years?
Stephen Chang: We think infrastructure investment may slow, due to local government debt constraints. Meanwhile, manufacturing, particularly in semiconductors and other technologies, will continue to receive support. However, export-oriented manufacturing faces risks from tariffs and global trade tensions.
Overall, China's economic landscape is complex, with various moving parts influencing growth prospects.
In our base case, we see China's real GDP growth ranging from 4 to 4.5 per cent in 2025, down from 5.0 per cent in 2024. We expect this growth will be supported by a fiscal stimulus of 1 to 1.5 per cent of GDP. In addition, we anticipate gradual policy easing, to encourage borrowing and investments.
Jingjing Huang: What spillover effects does China’s outlook have for the broader Asia region and the rest of the world?
Stephen Chang: We've analysed three scenarios, along with our base case that I just mentioned. First, in the unlikely scenario of no direct stimulus, growth could drop to 3 per cent. This would significantly affect countries with strong ties to China, such as Korea, Malaysia, Thailand, and Australia, and place negative pressure on commodity prices, such as oil and metals.
The second scenario is extra fiscal stimulus, where growth might reach 5 per cent. A consumption-driven stimulus could benefit agricultural exporters like Brazil and New Zealand. Conversely, if the focus is on investment, the spillovers to the world will likely be larger. Commodities might see a boost, as well as economies more reliant on Chinese investments, such as Taiwan and Vietnam.
The third and final scenario sees China doubling down on manufacturing, with a growth of between 3.5 per cent and 4.5 per cent. This may intensify global competition, however, leading to greater losses – and therefore higher subsidies – for less competitive Chinese firms.
Overall, the situation is very fluid, and we'll keep a close eye on developments.
Jingjing Huang: That’s consistent with what we highlighted in PIMCO’s latest Cyclical Outlook, uncertainty is certain. With Trump 2.0, China’s challenged economy, and elevated geopolitical risks, how should investors think about their portfolios?
Stephen Chang: Amidst this uncertainty, we continue to see opportunities in Asia Pacific fixed income markets. To capture short-term volatility, active investors can explore a broader set of markets and instruments, in order to extract structural inefficiencies and differentiated pricing created by market headlines.
However, as countries respond to both domestic pressures and external influences, we think investors should maintain a diversified set of positions and prioritise flexibility in their portfolio positioning.
Jingjing Huang: Thank you, Stephen, for sharing your insights. And thank you all for watching. To find out more about our outlook for the Asia Pacific region, please visit pimco.com. Until next time.