Abrdn’s China Financial Conditions Index (CFC) has hit a 10-year high, suggesting that policy loosening, which began last September, is likely to continue to provide a tailwind in 2025.
The UK-headquartered asset manager said that the CFCI closed 2024 at 2.1, with its previous record over the past decade being 1.6 in January 2016.
Abrdn noted that Chinese GDP grew by 5.4% year-on-year during the fourth quarter, outstripping expectations and suggesting that the economy could maintain momentum despite talk of a trade war with the US.
It noted that exports to the US increased during the fourth quarter, suggesting that there was some front running of tariffs, although overall it noted that external demand was broad-based during the quarter.
It added that the real estate sector, which has long weighed on the country’s economy, was showing signs of stabilising as well.
The firm also said that the policy pivot, which began on 16 September last year when the Politburo singalled a change in monetary and fiscal policy, had not even had much of an impact yet.
“The policy pivot observed since the end of September last year is unlikely to account for much of the acceleration seen throughout the fourth quarter,” said Robert Gilhooly, senior emerging markets economist at abrdn.
“Considering the delays between policy easing and its effects on the economy, the majority of the stimulus is probably still filtering through. This suggests that the recent easing measures should support growth into the first half of the year.”
Abrdn noted that trade tensions, which have seen US President Donald Trump slap 10% tariffs on Chinese goods and Beijing retaliate with 10%-15% tariffs of its own on US energy and farm equipment, would likely have a mixed impact.
“The timeline for US trade actions remains very unclear. We anticipate that the average bilateral tariff rate facing Chinese goods will likely settle around 35%-40%, up from approximately 15% at the end of Biden’s term in office and higher than the 25% implied by the latest tariffs announced on February 2,” said Gilhooly.
“However, such tariffs should prompt a more assertive easing by the Chinese authorities, mitigating much of the impact on growth.”
Abrdn noted that a combination of falling bond yields and further rate cuts from the People’s Bank of China during the fourth quarter had eased conditions in China to a degree not observed since the end of the global financial crisis.
“This is still some way short of the ‘bazooka’ level stimulus seen in 2009, but China’s recent policy pivot is significant– and the potential for further action now that the policy levers are primed – should help mitigate much of the impact from another trade war,” said Gilhooly.
“We anticipate more decisive measures to stimulate household consumption may be announced during the ‘Two Sessions’ in March, such as expanding the goods trade-in scheme and strengthening the social safety net.”
