JARRED SULLIVAN: The Red Dragon’s investment outlook

Contrary to market fears about the effects of global and domestic issues on China this year, a number of positive developments are signalling a return to stronger economic growth and investment attractiveness for the world’s second largest economy in the second half of 2025.

So far this year it has been encouraging for investors to see China’s outperformance compared to other emerging markets. This was largely thanks to new stimulus measures and policies that are restoring business confidence, an upsurge in important technological innovation, and the nascent evidence of turnaround in credit extension within its vast economy.

Talks with Alibaba founder Jack Ma and other business leaders are also a positive sign that the Chinese government is attempting to repair its relationships with private enterprise after earlier regulatory crackdowns. 

Are tariffs still a threat to the Chinese economy?

US tariffs on Chinese goods are not the existential threat to China that many imagine them to be. People tend to overestimate the effects of tariffs on global growth prospects, when in reality, services outweigh the bilateral trade of goods in the global economy.

In fact, bilateral trade between the US and China as a proportion of total trade has also meaningfully narrowed since US President Donald Trump’s first presidency in 2016, limiting China’s trade risk. Investors can operate with tariffs, albeit within the realms of reasonability, but they find it difficult to navigate around haphazard policy pronouncements.

We are also seeing positive signs that US-China tensions have simmered down since April, when Trump first threatened to impose steep tariffs on China. The world’s two largest economies are talking, and both have made it clear that they want a more sustainable outcome. 

China prioritises policies to restore business confidence

In a significant move to drive consumer-led growth, boost inflation and address its mounting debt challenges, China has unveiled its 10-point monetary policy stimulus plan. The country’s real GDP growth target for 2025 remains at 5%. With inflation hovering at about 0% for more than a year, authorities have now revised the inflation target to 2%, down from the previous 3%, in pursuit of a more attainable benchmark. A key objective of the plan is to stimulate consumer confidence and spending.

In recent years, China has also shifted from a one-child policy to a three-child policy to address the growing demographic skew towards an ageing population — an issue that continues to weigh on labour force participation and, by extension, sustainable potential growth. To diversify its foreign exchange reserves, the People’s Bank of China has been accumulating gold at a rapid pace while simultaneously reducing its holdings of US treasuries. While we do not believe this signals a broader move towards de-dollarisation, these actions appear strategic — aimed at reducing dependency on US capital markets and enhancing reserve resilience.

China tackles credit problems but property sector at risk 

The most well-known example of the country’s recent credit challenges is the implosion of its debt-ridden property sector during the pandemic. It was a wake-up call for the Chinese government, which is now attempting to balance risk containment with gradual stimulus to avoid a full-blown financial crisis. Course correction entails managing systemic debt risks in the economy, while shifting the focus to hi-tech and consumption-driven growth.

For the first time in a long while, China’s credit impulse has turned positive — an encouraging sign that sentiment within the region may be stabilising. However, whether the government is doing enough to resolve the broader credit crisis remains uncertain. The root causes of China’s credit challenges still require deeper structural reforms, with a shift in policy focus from short-term liquidity support towards addressing long-standing solvency concerns.

AI and tech innovation in China 

The return of technological prowess is restoring many investors’ faith in China’s innovation capabilities and encouraging a renewed interest in its tech sectors as an attractive opportunity. DeepSeek, a Chinese artificial intelligence (AI) company, is one such success story. It recently released an open-source large language model comparable to GPT4 and is already rivalling popular Western AI models due to its lower cost, faster rollout speed and greater energy efficiency. China’s long-term success and sustainable returns will require the localisation of intellectual capital, and DeepSeek signals that the country is moving in that direction.

Confidence is the cheapest form of stimulus. When confidence returns, so does long-term borrowing and investing — what we call sticky money. If the Chinese authorities can fundamentally and structurally address the country’s challenges, rather than merely placing plasters over bullet wounds, we are likely to see a meaningful return of long-term investor confidence in China.

• Sullivan is global multi-asset investment strategist at Ashburton Investments.