China’s stock market has had a great first half of the year. But the situation is likely to get far more complicated going forward. Direct tariffs are obviously a major factor but China’s own issues continue to cause stress in the economy, and as we talked about in our recent Breakfast Bites, the US seems to be targeting China through their other trade relationships.
In the first half of 2025, the Shanghai Composite Index was up about 5.5%, YTD up about 7.5% and +13% from the lows in April. While the performance is nowhere close to US markets, it’s still impressive after what the stock market experienced in 2023 and 2024.
Some of this was because of the AI frenzy, but some of it was also because the government finally started acknowledging that something needed to be done about the situation.
But I fear this may change again.
This morning, we got the GDP numbers. China posted a GDP growth of 5.2% YoY in the second quarter.
I know there’s a lot of debate about the veracity of these numbers. But the way I see it, this is the data that the government bases its decisions on, and this is the data we have. So let’s take this at face value and try to map out how this affects the markets.
China’s growth target for the year was set at 5%. With the first two quarters coming in at 5.4% and 5.2% respectively, they have exceeded their growth target. This could mean complacency sets in. Not just that, we also have the tariff situation weighing on the economy. Domestic spending, while recovering, still shows signs of sluggishness.
Much of the boost has seemingly come from the “stocking up” ahead of tariffs. Export data released a day earlier beat expectations, and imports also rebounded. The trade surplus with the US hit $26.6B in June, up from $18.0B in May, bringing the H1 total to $141.7B. Exports to the US, however, were down -16.1% YoY, but a notable improvement from May’s -34.4% drop.
To be fair, most of the problems that China has been facing over the past few years have not been resolved. While I completely understand that these problems can’t be solved in one go, I think the process of addressing this has been quite slow.
The Chinese Government seems to be drip-feeding stimulus measures instead of releasing the bazooka that we were hoping for.
A Brief Background of the Issues
A year ago, I did a presentation on the issues that China faced. Let’s recap some of those issues.
What China has been facing is a debt-deflation spiral. We’ve seen a crisis of confidence among consumers, and that’s leading to a drop in the property sector. There was a period of overbuilding, for sure. But even the consumers who do have funds don’t want to invest right now. And therefore, we’ve been seeing home prices falling.
June new home prices fell at the fastest pace in eight months. The broader China property index dropped -3.7% as sentiment continues to deteriorate in the sector.
Now, the largest buyer of land was the property companies from the local government. The local government issued bonds to develop the prefectures, and relied on cash flows from land sales to service that debt. The local government debt, in turn, was bought by corporates, who in turn employed the consumers. This is one reason that youth unemployment increased significantly.
So this is where we have a vicious cycle. Granted, this is a very simplistic account of the issues, but you get the point.
So, where do we go from here?