Teresa Rivas

Celebrations for the Lunar New Year are over, but China still faces many of the same old problems -- apart from tariff worries -- in the year of the snake.

China's economy has been sluggish in recent years, hurt by the lingering impact of the Covid-19 pandemic. Despite stimulus from Beijing, tepid consumer appetites and concerns about the property market have continued to weigh on the nation.

Those worries done little to dampen investor enthusiasm however. The iShares MSCI China exchange-traded fund has risen more than 36% in the past year, and is up 3% since the start of 2025.

That may be surprising given the economic backdrop and the Trump administration's zeal for tariffs, which China being one of the new president's main targets. And the country's onshore financial markets did take a hit when they reopened after the Lunar New Year holiday. Yet the relatively muted response in the stock market and China's currency potentially reflects other factors, notes Capital Economics Thomas Matthews, head of markets in the Asia Pacific region.

Part of that could be attributed to the temporary reprieves secured by Canada and Mexico, he notes, as investors are hoping that China, too, can delay and blunt some of the most painful levies. "In China's case, it's also quite likely that the authorities have a finger on the scales, especially with regards to the currency, in order to limit volatility," he writes. That could explain why the renminbi, China's currency, has remained one of the best performers against the U.S. dollar recently.

The problem is that the rosiest outcome may not come to pass, in which case China's domestic market could have farther to fall if it has to face some of the more punishing tariffs the White House has promised.

"But tariffs are, in our view, only one reason to be downbeat," warns Matthews. China has kept the renminbi steady despite plunging domestic yields for its government bonds, amid ongoing weakness and the expectation for policy cuts. Moreover, "economic troubles are probably more reason for the People's Bank of China to let the currency weaken, even if they're likely to do so only gradually to avoid further provoking Trump (and other world leaders)."

There's also reason to question the profitability of China's companies, he writes. Even if it turns out that investors aren't being too optimistic about tariffs and further government stimulus, there's the fact that Chinese companies "have struggled for a long time to generate sustained growth in earnings per share (EPS)." Even though they've recently accelerated, EPS are still lower than 10 years ago -- a decade when the macro backdrop was much more supportive than he thinks the next one will be.

China's property market remains another worry too. One of the initial criticisms of China's sweeping stimulus was that it did little to address this major drag on the economy, and as Barron's reported earlier this month, the fallout from the real estate bubble is still being felt as China Vanke -- one of the country's biggest and most conservative developers -- cautioned it could see a $6.2 billion net loss, and announced management changes. While the government has taken control of the firm, it's the latest blow to the reputation of developers and further trouble will likely do little to encourage consumers' faith in any tepid property recovery.

One potential bright spot is tech.

Markets careened lower last week after the publication of a paper suggesting Chinese chatbot DeepSeek -- which largely matched OpenAI's ChatGPT product in many areas -- was much cheaper to produce than Silicon Valley's large language models. There are very legitimate reasons to question the validity of those claims, but at the same time it isn't inconceivable that Chinese firms such as Alibaba Group Holding, Tencent Holdings, and Baidu have made great strides in AI.

Of course the U.S. government is now considering a potential DeepSeek ban, complicating the picture for Chinese tech, at least in the near term. That's part of the broader trend of uncertainty that's marked recent weeks and seems unlikely to change.

With so many other worries swirling around China's markets, a wait-and-see approach may prevail for now. In the year of the snake, the last thing investors want to see is their investments crawl.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 06, 2025 11:27 ET (16:27 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.