GAM Investments’ Jian Shi Cortesi, Investment Director, Asia/China Growth Equities, discusses the likely impact of a US trade war on China’s exports and equity market.
18 February 2025
With Donald Trump re-elected as US president, worries about emerging markets, particularly China, have been growing. However, contrary to popular belief, during the last Trump presidency China’s exports and Chinese equities performed exceptionally well, with the China equity market rising by 100% over his first term. Why?
Why did Chinese exports rise after the first trade war?
Chart 1: China trade balance (CNY)
Source: Bloomberg, GAM, as at 31 December 2024. The views are those of the manager and subject to change.
Chart 2: China exports
Source: Bloomberg, GAM, as at 31 December 2024. The views are those of the manager and subject to change.
In Chart 1, you can see China's trade balance. In 2018, the monthly trade surplus in China was roughly CNY 200 billion, growing to CNY 600 billion by 2024. Despite the 25% tariff imposed by the US, China’s trade surplus has continued to grow. Since 2018, Chinese export levels have nearly doubled, even with the US tariffs. What is the reason behind this?
First, the US is only a part of China’s export market, and it has become a smaller part after the tariffs were imposed. Most Chinese companies' sales are not to the US or Europe. Rather, the largest chunk of sales exposure for Chinese companies is domestic China, estimated to account for 86% in 2024.1 For example, Chinese consumer products are mostly sold in China, and Chinese internet companies generate most of their sales domestically, with only a small portion coming from other countries.
Over the last six years, China has started exporting to many other countries, especially emerging markets, and this segment is growing rapidly. Chinese companies have diversified their customer base over this time, selling more to countries outside the US. The part that is growing most rapidly is the emerging market segment. Given this exposure, the direct risk of Chinese companies' revenue declining due to US tariffs is relatively small.
Additionally, exports from China to the US are being rerouted. We see evidence of Chinese products first going to Vietnam or India, where some parts are added or the packaging is remade, and then they are shipped to the US. These factors show that tariffs do not necessarily lead to a decline in exports because people find creative ways to circumvent them.
Why China equity rose 100% in the 1st Trump presidency
Chart 3: MSCI China Index
Source: GAM, Bloomberg, data as at 31 Dec 2024.
Past performance is not an indicator of future performance and current or future trends. The views expressed herein are those of the manager and are subject to change. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Please see “Disclaimer” at the end of this material for important disclosures regarding the information contained herein. Indices cannot be purchased directly.
Past performance is not an indicator of future performance and current or future trends. The views expressed herein are those of the manager and are subject to change. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Please see “Disclaimer” at the end of this material for important disclosures regarding the information contained herein. Indices cannot be purchased directly.
During the last Trump presidency and trade war, China equity rose by 100%. If you look at the period from 2017-2018, this is when Trump took office and started the trade war. The peak of the MSCI China Index was in 2021, when Trump ended his presidency. Why did Chinese equities rise by 100% during this period?
There was not just the trade war but also the Covid-19 pandemic in 2020. Despite these two significant negative macro events, China equities doubled in value. The first reason for this is low valuations. When Trump became president in 2017, China equities were trading at very low valuations, which set a solid foundation. Currently, we are again looking at China sitting at very low valuations.
The second factor is ample global liquidity. During Trump's four years in office, there was a lot of global liquidity that flowed into equities, fixed income and other assets. This was positive not just for global assets but also for Chinese assets. I expect ample liquidity again under the upcoming Trump presidency.
The third reason is domestic policy. For China equities, domestic Chinese policy matters much more than external factors. During the last Trump presidency, China had very supportive policies, and now we again have a similar backdrop. For these reasons, I am fairly optimistic. Although I would not predict another 100% increase during the next four years of Trump's presidency, the simple logic that US tariffs will negatively impact Chinese equities just does not hold, in my view.
Catalyst: China technology becoming visible
The key catalyst for Chinese equities is the visibility of technology, shifting investor perception from risk to opportunity. The recent DeepSeek news is significant, as it highlights China's leadership in various technologies.
DeepSeek provides international investors with visibility into Chinese artificial intelligence (AI), previously overlooked. In fact, companies like Alibaba, Baidu, Tencent and ByteDance have made significant progress in AI models. The competition among Chinese large language models (LLMs) will make them more powerful and cost-efficient, potentially positioning Chinese firms as leaders in AI, similar to the Chinese electric vehicle (EV) industry, as discussed in a previous article, ‘China – the simmering transformation’.
DeepSeek shifts investor focus from risks to potential, especially given the valuation discount2 compared to US peers. While DeepSeek was well-covered due to its impact on US names, Chinese companies have been leading in several technological innovations. For instance, DJI holds 70% of the global market share in drone technology. Chinese electric car exports have surged since 2020, driven by high-quality and competitively priced vehicles. China is also ahead in high-speed rail and clean energy, with 80% to 90% of the solar supply chain based in China and 60% of renewable energy expected to be generated there in three years. Companies like Unitree are making advanced robots, including USD 3,000 robot dogs and humanoid robots. In AI, China holds the most patents globally, with companies like Alibaba, Tencent, Baidu and ByteDance launching advanced models. China also leads in quantum computing research and has its own space station. China is catching up in semiconductors, with Huawei's recent GPU achieving 60% of Nvidia's capacity. These advancements, part of the "Made in China" plan, are not well-known to international investors yet, but all contribute to creating significant investment opportunities in my view.
Jian Shi Cortesi manages China and Asia equity strategies at GAM Investments.
1Source: Goldman Sachs, as at 31 December 2024.
2MSCI China Index has a forward P/E ratio of 10.05 and a P/B ratio of 1.41. Source: Bloomberg, MSCI, as at 31 December 2024.
2MSCI China Index has a forward P/E ratio of 10.05 and a P/B ratio of 1.41. Source: Bloomberg, MSCI, as at 31 December 2024.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 657 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 657 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.