Bearing Fruits From “Made in China in 2025”

In a new Citi Research report, a team of analysts and economists led by Xiangrong Yu and Pierre Lau look at the economic and equity-market trends supporting China’s market rally, assessing factors that might become tailwinds to sustain and broaden the rally, as well as ones that could become headwinds and derail it.

China’s markets started the Chinese New Year with a new rally, lifted by multiple catalysts. Hong Kong’s equity market has outperformed that of the U.S. so far this year, U.S. tariffs have so far turned out milder than expected for China, and the news around DeepSeek and President Xi’s meeting with business leaders were a reminder to markets of China’s capacity for innovation.

So far the rally has been driven largely by tech-led sentiment. The Hang Sang Tech Index has gained ~25% since mid-January, with strength in tech helping boost consumer discretionary names. But consumer-staples and real-estate names continue to lag, which wasn’t the case during last September’s rally. Fixed income and commodity markets haven’t shown much appreciation for the tech narrative, and data releases haven’t pointed to significant changes in economic fundamentals.

Potential tailwinds…

What would it take to sustain and broaden this rally? From an economic perspective, we see four possible catalysts.

The first is property-market stabilization. China’s property downturn has now entered its fifth year and remains a major overhang on the economy. But we could be closer to stabilization than at any time in the downturn: Property sales and prices have turned out better than expected, and there are signs of support from policymakers. Our baseline remains that stabilization will arrive in the second half of this year or early 2026, as we think lower-tier cities still need assistance to make progress. Fiscal policy strikes us as essential to that progress.

A second potential catalyst is a rebound in consumer confidence. Both wealth and income matter to helping consumer confidence escape the trough it’s been in for the last two and a half years. A wealth effect from stable property prices and equity markets could help, as could cash support through efforts such as this year’s pay hike for civil servants and expanded trade-in programs. If consumer confidence stops deteriorating and households start to tap into their excess deposits, we could see a broad-based improvement in macro indicators.

Supply-side reform 2.0 refers to a potential second round of policies aimed at improving production by addressing imbalances on the supply side of the economy, notably excess capacity in industries. Such a program could be a catalyst, with corporate profitability concerns triggering such efforts. Industrial utilization hasn’t dropped to the levels seen in 2015–2016, when the last round of supply-side reform was instituted, and the overall overcapacity issue may be less severe. But China’s Producer Price Index has been negative for 28 months, with no sign of a decisive pickup. Fiscal policy and revenue are also under pressure, making a more plausible case for a new round of supply-side reform. 

Finally, a catalyst could come from a U.S.–China trade deal. So far, U.S. tariffs on Chinese goods have come in broader than expected but also milder than expected, with China’s responses measured. We also see differences between the first Trump administration and the second in their dealings with China. The U.S. is targeting other countries besides China with its America First Trade Policy and reciprocal tariffs. China’s exports to the U.S. as a percentage of its total exports have dropped to 14.7% in 2024 from 19.0% in 2017; even with additional U.S. tariffs, we think the direct impact on China’s economy could be smaller scale. China’s dominant share of global trade makes implementation of tariffs challenging. And U.S. inflation worries could be more pronounced than they were in 2018–2019.

…and possible headwinds

So what could derail China’s market rally?

U.S.–China trade disputes could escalate, a risk we think remains material. There are several potential pathways for escalation, from reciprocal tariffs to the forthcoming review of U.S. trade policy. 

We also note that almost every recent market bounce has been followed by fiscal-policy hopes and then disappointment. A number of factors could lead to policies arriving later and smaller than expected. 2024’s 5% GDP growth, a solid start to 2025 growth, tech breakthroughs and trade disputes so far proving milder than expected could also drive policy complacency. Monetary policy has already moved into wait-and-see mode, and we don’t expect cuts until the second quarter. We see March as the real test for the economy and markets, with the 14th National People’s Congress (NPC) beginning March 5th. Our expectations for the NPC are for a fiscal expansion of RMB2.5 trillion, with trade-in subsidies doubling to RMB300 billion in 2025. On the economic front, we expect mid-March data to show a solid start, with potential upside from front-loading of exports. But a broad-based macro recovery marked by reflation may not yet be imminent.
 

“Made in China 2025” bears fruit

China stocks seeing the biggest share-price gains so far this year are ones with investment themes related to robotics, electric-vehicle capex, edge AI for smartphones and PCs, as well as DeepSeek-related plays. Investors have shown more risk appetite for tech names, and the valuation of Chinese tech companies have been inexpensive compared with U.S. peers. The Hang Seng Internet & Information Technology Index has risen 27% to date and 37% from its January trough, boosted by AI technology breakthroughs. 

We also note that seeds planted in the “Made in China 2025” plan are bearing fruit. “Made in China 2025” is a national industrial-policy and strategic plan originally advocated in May 2015 to deepen development of China’s manufacturing industries. Its goal is to evolve China’s economy from producing primarily low-tech products that leverage inexpensive labor and raw materials to a more tech-intensive manufacturing base that produces higher-value-added goods. While the plan has seen less emphasis since 2018, recent press accounts have suggested it’s largely succeeded, with China achieving a leadership position in several key technologies, a signal of its increasing influence in industries critical to future economic growth.