China, while facing internal headwinds from a sluggish economy and external pressures from a Trump administration in 2025, sees investors adopting a cautious stance towards Chinese equities. However, their outlook remains relatively optimistic, given the continual rollout of fiscal and monetary stimulus measures.

At China’s recent Politburo meeting on December 9, the implementation of a more proactive fiscal policy was proposed that involved increasing fiscal expenditure and expanding domestic demand.

The importance of stabilizing the real estate and stock markets was also reiterated at the meeting with discussions on the need to address risks in key sectors and mitigate external shocks. Notably, the meeting, for the first time in over a decade, called for a shift to a moderately accommodative monetary policy, moving away from the previously maintained prudent monetary stance.

“The adjustment in monetary policy from prudent to moderately accommodative reflects China’s continued commitment to a supportive monetary stance,” notes Bin Wen, chief economist at China Minsheng Bank. “This approach aims to ensure reasonably ample liquidity, further reduce overall financing costs for businesses and households, and foster a favourable monetary and financial environment to drive a sustained economic recovery.”

This announcement drove the Hang Seng Index to surge near the end of trading hours on the day of the meeting. However, the index has not experienced sustained growth since then, but has instead remained relatively stable in recent days.

Chinese equities surged 35% from their September lows to their October peak, driven by investor expectations of more aggressive fiscal stimuli from China. However, the rally lost momentum after the announced fiscal measures fell short of market expectations. Additionally, the re-election of Donald Trump, according to analysis by Cambridge Associates, has raised concerns about potentially more hawkish US policies towards China.

A slightly different perspective is offered by RBC Global Asset Management in a recent 2025 outlook report, namely, China, heading into 2025, will face significant external pressures following president-elect Donald Trump’s tariff agenda, which includes the threatened imposition of a 60% tariff on Chinese imports. However, this threat, RBC analysts note, is expected to be primarily a bargaining chip aimed at extracting concessions from China, with the eventual tariffs likely being lower than initially proposed.

While tariffs could exacerbate challenges for the Chinese economy – already facing domestic hurdles in sustaining continuous growth – it is expected there will be mitigating factors to buffer the impact. However, such tariffs, the RBC report estimates, could reduce China’s aggregate real GDP by 1.6% within two years of implementation. As well, substantial fiscal stimulus – currently projected to be at least 1.4% of total GDP – could largely offset the negative effects of the tariffs and declining exports.

The Chinese government’s determination to stabilize the property market is seen as crucial for boosting domestic demand and supporting equity market valuations. RBC remains cautiously optimistic about Chinese equities, as many of the economic headwinds appear to have already been priced into the market. There is more upside potential, the firm believes, than downside risk in 2025.

However, in 2025, the rally in Chinese equities is expected to stall, though not necessarily collapse as markets have already priced in much of the anticipated benefits from increased fiscal and monetary stimulus.

With Chinese equity valuations returning to fair value, any further re-rating of the market, according to Cambridge Associates, will depend on improvements in China’s economic data and corporate fundamentals, which are likely to take time without additional policy support.