Tariff truce eases tensions

On May 12, 2025, the U.S. and China significantly rolled back tariffs on each other’s goods for an initial 90-day period. The U.S. reduced tariffs on Chinese goods from 145% to 30%, while China cut retaliatory tariffs on U.S. goods from 125% to 10% for the period. Additionally, President Donald Trump’s revised executive order lowered tariffs on small packages valued under USD 800 from 120% to 54%. While further developments in trade talks are expected ahead, the truce was well received by the markets, with the MSCI China Index climbing 17% since April 7, 2025, lifting year-to-date returns to 15% (as of April 16, 2025).

"Regardless of the outcome of the trade deal, several trends are emerging, poised to reshape the global economic landscape…."

At the expiry of the 90-day window, we might see further escalation or de‑escalation. Regardless of the outcome of the trade deal, several trends are emerging, poised to reshape the global economic landscape and redefine investment opportunities.

Transformation of global supply chains

The U.S. is advancing its reindustrialization agenda, with tariff policies as a cornerstone. This strategy prioritizes strategic sectors such as semiconductors, electric vehicles, pharmaceuticals, steel, and shipbuilding. As a result, global supply chains in these industries are undergoing significant disruption and reconfiguration. The highly integrated, globalized supply chain model is giving way to a more regionalized yet interconnected framework. This shift presents challenges for all economies, but those with robust domestic markets and comprehensive industrial ecosystems are better equipped to adapt.

China’s resilience amid tariff pressures

With lingering uncertainties from tariffs, it’s helpful to assess their potential impact on the Chinese economy.

Over the past decade, China has implemented proactive measures to mitigate external pressures. The Belt and Road Initiative has broadened access to global markets, diversifying trade partnerships, while the “dual circulation” strategy has fortified domestic economic resilience. Additionally, breakthroughs in critical technologies have eased supply‑side bottlenecks, and deleveraging in the financials and real estate sectors has reduced systemic risks, positioning China to better absorb potential shocks.

The economic impact from tariffs is moderated by China’s reduced reliance on U.S. markets. In 2024, exports to the U.S. (including re-exports) accounted for approximately 3% of China’s gross domestic product (GDP), down from 6% in 2010, reflecting a significant shift in trade dynamics.

At the corporate level, the impact of tariff escalation is limited for most Chinese firms, with U.S. exports comprising only around 1% of the average revenue of listed companies—one of the lowest U.S. exposures globally. Escalation may exacerbate slower economic growth, but firms are adapting by accelerating globalization strategies.

Since 2018, many have pivoted from export-focused models to globalized operations, a trend likely to intensify. Companies with advanced technologies and operational agility are well placed to seize opportunities, even in a volatile trade environment, supporting long-term equity resilience.

"Enhancing domestic consumption aligns with China’s internal needs…."

Domestic demand as the economic anchor

1. Building a more balanced economy
   Enhancing domestic consumption aligns with China’s internal needs and is essential in the current external environment. This transition will be supported by strengthening the social  safety net, improving health care, and expanding educational opportunities. The investment focus is expected to shift from “hardware” (infrastructure) to “software” (human capital).
2. A stabilizing property sector
   The real estate sector is showing signs of stabilization, with housing starts declining by 68% from the peak in 2021, which had significantly impacted the overall economy. However, inventories in major cities are nearing normalized levels. While we do not anticipate a strong rebound, we do expect the negative impact to diminish over the next one to two years.
3. End market improvements
   After several years of downturn, specific end markets are beginning to show improvement, particularly in construction machinery, wind power, automation, and railways.

Multifaceted opportunities

1. Evolving consumer trends
   The consumer market is undergoing a transformation. Selective businesses in traditional categories, such as dairies and beer, are seeing incremental improvement with companies’ self-help measures. Meanwhile, hotel chains and shopping malls are experiencing steady growth through market consolidation. Furthermore, we are witnessing the emergence of new consumption patterns, particularly in intellectual property, fresh beverages, and snacks, signaling a dynamic shift in consumer preferences and behaviors.
2. Technological innovation
   While DeepSeek has highlighted China’s capabilities in artificial intelligence (AI), rapid technological advancements have been occurring over the past few years and are expected to accelerate further. Although China faces constraints in computing power, we think that it is well positioned for the application and commercialization of AI technologies. For instance, in the automotive sector, China has established strong leadership in electric vehicles and is expected to potentially lead in autonomous driving. In biotechnology, China has transitioned from a generative market to an innovation powerhouse, with approximately 30% to 40% of global biotech out‑licensing originating from China in 2024.¹
3. Dislocation opportunities
   Market dislocation has presented bottom-up investors with opportunities to capitalize on indiscriminate sell-offs by acquiring export-related stocks that have been oversold.

Companies with forward-looking strategies and flexible approaches stand to gain market share as the market evolves. Staying calm and conducting objective fundamental analysis can help investors uncover undervalued investment opportunities in China with significant potential.