Much to the protestations of linguists who claim that the adage is demonstrably false, the business community often says in strategic planning that Chinese word for ‘crisis’ is a combination of the characters for ‘danger’ and ‘opportunity’. Beijing will appreciate that although the return of President Donald Trump may pose new challenges and uncertainty, it also presents an opportunity for a serious economic rethink.

A reversal of globalisation?

The global economy is gearing up for greater volatility in the world’s most important bilateral geopolitical and trade relationship. Domestic and international investors appear to be approaching Chinese assets with a degree of nonchalance compared to the last eight years.

After the first Trump administration, China and investors are better prepared for all outcomes. From Beijing’s point of view, the past four years have seen an increase in deglobalisation, so the marginal impact of any hike in tariffs is far lower compared to 2016.

For example, US tariffs against Chinese electric vehicles already stand at 100%, and this was swiftly replicated in Canada. For much of the high-quality exports that China is developing, the US ceased to be a target market a few years ago.

The opportunity cost may prove to be high and there will be growth and price aspects related to tariffs on existing trade, but the net cost is considered manageable, albeit at a cost to global potential growth.

BNY custodial iFlow data show that investors have been reducing emerging market allocations in recent years. This is such that, outside of the currency, there is very limited scope for risk aversion to manifest itself in Chinese assets (Figure 1). Here, our data indicate that the flow response to stimulus announcements this year has been indifferent, and there has been close to no recovery or offset of the outflows from Chinese equity and bond markets over the last few years.

---

Figure 1. Limited scope for risk aversion in Chinese assets
$bn
Source: BNY iFlow data

---

In our view, the balance of risks is tilted towards inflows into China. There is very little to sell if growth or other risks materialise to the downside, while the bar is low to upside surprises. In turn, this could trigger strong inflows due to heavy underweights relative to the size of China’s economy and capital markets.

China is changing course on growth

Based on statements from the authorities since December, we believe that China has clearly acknowledged the need to change growth course towards the household and consumption. Fresh stimulus is expected to be part of the 2025 National People’s Congress agenda – the annual sessions of China’s legislature where growth targets are announced. The quantum of stimulus aside, markets will closely follow spending plans to discern whether there is rebalancing in favour of households, in addition to traditional support for corporates and local authorities.

Similar discussions are necessary beyond Beijing. Concerns over stubborn inflation and fiscal sustainability is driving bond yields higher in many economies, but for exporters with ample surpluses (China’s hit almost $1tn in 2024) and household savings, the market verdict based on bond yields in the European Union and Japan is that public investment is not enough to lift trend growth expectations.

For too long, the global economy and its manufacturers have been dependent on US demand, whose untrammelled nature disincentivised rebalancing among exporters. Irrespective of the result of global trade tensions, there is realisation among such exporters that the status quo is untenable and substitution is not possible.

Resources are available for greater levels of public investment in support of higher competitiveness and real income growth – both of which are essential for repricing of growth expectations through asset markets. If delivered, re-pricing in Chinese government bond or euro area sovereign yields would open up new channels for duration investment for investors who are increasingly nervous about Treasury holdings and seeking liquid alternatives for diversification.