China’s National People’s Congress Session Preview

With additional content provided by Brian Booe, Associate Analyst, Research.

Chinese equities with artificial intelligence (AI) exposure have surged since AI start-up DeepSeek briefly rattled U.S. tech stocks with its low-cost, open-source model that rivaled the performance of its much larger U.S. rivals at a fraction of the cost. Simultaneously, over the last month, China has been a focal point in tariff and trade sanction conversations from the White House. While we acknowledge tariffs are a major factor and could be a headwind, they are unlikely to stifle the Chinese economy. Tariff actions have arrived softer than expected so far, and there is some optimism that China can strike a deal with the U.S. to avoid the worst of future tariffs.

It is also important to note that China has radically transformed its economy over the last six years, as they are no longer just producers of low-margin goods. They have become an important producer of big-ticket industrial items, which they export to many emerging markets. This has seen their trade surplus increase by about 300%, as the U.S. has become a much smaller part of their total trade. As such, domestic dynamics more likely than not will be the most critical factor for the Chinese economy and equity markets this year.

Stimulus Measures Have Overpromised and Underdelivered

Outside of trade actions and tech optimism, attention turns to legislative meetings, including the National People’s Congress Standing Committee (NPCSC), which is set to conclude its two-day session today. While the NCPSC session will draw some eyes, markets will be primarily sniffing for clues as the Committee makes preparations for the more prominent National People’s Congress (NPC) meeting, which opens its annual session on March 5.

The firing of the so-called stimulus bazooka in late September buoyed Chinese stocks last quarter, with measures highlighted by slashed interest rates, equity investment funding, and reductions to the down-payment ratio to aid the property market downturn. Since then, authorities have been hard at work to rejuvenate the struggling economy, pledging to deploy fiscal spending needed to spark growth, trimming reserve requirements for banks, announcing massive debt packages to stabilize growth, and offering tax incentives on property transactions. Further, the Politburo (the Chinese Communist Party’s (CCP) supreme policy-making body) updated China’s monetary policy posture to an “appropriately loose” stance, marking the first change since 2010. Nonetheless, recent economic data has continued to fall short of expectations. Manufacturing activity unexpectedly contracted last month, and services activity declined sharply, clinging to expansion territory, while weak inflation data shows the economy is still stuck in the doldrums.

The suggested agenda for next week’s NPC meeting indicates authorities will examine implementation of the 2024 annual plan on economic and social development and draft the 2025 plans.

Chinese Economic Data has Missed Expectations Since December

Source: LPL Research, Bloomberg 02/24/25
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Forceful Stimulus Will Be Key

Despite the sentiment boost from DeepSeek last month, limited gains outside of the tech sector point to lingering skepticism toward the economy and policies, indicating more forceful stimulus will probably be needed to extend the rally. Despite the deluge of stimulus actions since September, consumer confidence remains low, and both consumers and the property market continue to require additional support. Forceful policy will be needed to offset U.S. tariffs and a potentially weakening yuan, while also fueling and supporting any improvements in housing and consumer confidence. Last year’s stimulus announcements laid the foundation, and now investors are hoping authorities will deliver on their pledges, including purchasing unsold homes and offering accelerated consumer programs such as consumption vouchers. Broadly, markets are hoping for specific numbers on fiscal policy, which, by definition, could stem from measures such as direct subsidies, loans, or tax incentives for individuals, companies, or industries.

Plus, clarity around growth targets and the budget deficit for 2025 remain top of mind following vows to raise the budget deficit and ease monetary policy to stabilize economic growth, aiming to meet a confident 4.5–5.0% target. The PBOC has yet to deliver additional rate cuts due to separate efforts to help support the yuan, and markets have grown frustrated by a liquidity squeeze from increased debt issuance, with more debt issuance likely forthcoming, despite banks already rushing to absorb recent issuances.

Conclusion

Chinese equities have already erased a weak start to 2025, and the ingredients may be in place for a positive 2025. Some of the fog will likely lift following the NPC meeting, and markets will also be on the lookout for additional U.S. tariff clarity. The LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) maintains its underweight stance toward emerging market (EM) equities, in which China is the largest market, with a preference for U.S. stocks. China may have become more investable lately, but governance remains concerning as companies generally must align with CCP objectives, and policy support thus far has mostly overpromised and underdelivered.