Year of the snake

In the Chinese zodiac, snakes are intelligent, strategic, and adaptable. They are even-tempered, showing a cool and calm exterior accompanied by bursts of energy and passion. Investors in Chinese equities may need all these qualities when navigating what is expected to be a challenging year ahead.

The year of the snake began nine days after Donald Trump’s inauguration as the 47^th president of the United States. Investors in Chinese equities are braced for the impact of tariff hikes, which risk negatively impacting exporters, who benefited from robust demand in 2024. There is also the risk of a further tightening of restrictions on access to artificial intelligence chips.

From a Chinese policy perspective, the bigger the tariff hikes, the bigger the monetary and fiscal policy response is likely to be.

In contrast to President Trump’s first term in office, the Chinese government is better prepared to proactively and flexibly respond. US economic nationalism will likely be matched by Chinese fiscal and monetary policy support to strategic industries as the economy continues to close the technological gap with the United States.

The Chinese yuan is likely to weaken to support exporters, but we expect the depreciation will be controlled with no significant surprises in its daily fixing against the US dollar. Bond yields have already declined, reflecting market expectations of interest-rate cuts to ease the debt servicing burden on households and local governments.

Investors and policymakers alike understand the challenges facing the Chinese economy well. A stepped-up policy response is likely in the year ahead to ensure external policies to contain China’s development do not compound its internal challenges. In our view, this creates opportunities for investors who are prepared to be patient, taking a long-term view.

In addition to coordinating an effective monetary and fiscal response to President Trump’s tariffs, Chinese policymakers in the year of the snake will continue to grapple with the Three Ds: debt, deflation and demographics.

Investors recognize the policy challenges created by the Three Ds, and equity market valuations reflect them as well. It is important to frame these challenges with thematic growth opportunities, which include companies that offer attractive shareholder return policies and elevated dividend yields; global leaders in sustainability solutions trading at a discount to intrinsic value; and companies serving domestic consumption, which is likely to benefit from targeted stimulus measures.

Thematic Growth Opportunities in China during the Year of the Snake

The year of the snake will feature the third session of the National People’s Congress (NPC) on March 5, 2025, also known as the “Two Sessions.” The event is expected to shape the country's economic policies and growth targets for the coming year. It is possible that there will be a significant stimulus announcement at this meeting if President Trump’s tariff announcement has a greater-than-expected impact on the growth outlook.

Chinese companies with progressive shareholder return policies and high dividend yields remain a key attraction for investors, in our view, particularly given the decline in bond yields, which makes the equity dividend yield increasingly attractive. Low valuations also create a sufficient margin of safety for investors.

Increasing the return of capital to shareholders indicates to us that companies are trying to strike a balance between growth and shareholder returns. It is a recognition that growth has slowed as well as a response to demands for improved corporate governance and regulatory pressure for listed companies to increase payouts. Nevertheless, selected sectors, including consumer discretionary, are still growing and investing at a steady clip and have the balance sheet flexibility to increase capital returns.

China continues to be a leader in sustainable solutions, including the electrification of transportation and the decarbonization of the electricity grid via wind and solar energy. Its market share in electric vehicles in Europe and emerging markets is estimated to be 25% and 15% respectively.¹ In Europe, technology transfer via building auto factories in the region is likely to be the price to keep European markets open for auto exports. In emerging markets, the low cost of Chinese electric vehicles is a key attraction which is likely to support demand.

The NPC may announce an upward revision to the government’s fiscal deficit, creating room for increased stimulus. This could finance targeted measures to boost household consumption, focusing on white goods and auto trade-in subsidies as well as consumption vouchers during major holidays.

The year of the snake is likely to be a volatile one for Chinese equity investors. Initially, it will be dominated by President Trump’s tariffs and his willingness to do a deal with President Xi Jinping, whom he holds in high regard.

The Three Ds: Debt, deflation and demographics remain structural challenges for the Chinese economy. Nevertheless, we are focusing on structural thematic opportunities to generate returns in the year of the snake. These include companies with progressive shareholder return policies and elevated dividend yields, global leaders in sustainability solutions and companies with exposure to domestic consumption.