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Mounting Trade Tensions to Drive Step-Up in China Policy Support

Fitch Ratings expects the US to raise tariffs on imports from China, with a baseline assumption that the effective tariff rate will rise to 35% from mid-2025, from 10%. Weaker exports will be a drag on growth even as domestic demand growth stays weak and deflationary pressures linger, amid ongoing property-sector challenges, poor household confidence and high leverage.

Against this backdrop, we expect fiscal and monetary policy to become more stimulatory in 2025. The authorities’ recent shift to a “moderately loose” monetary policy stance increases the potential for policy interest rate cuts beyond the 25bp that we currently expect in 2025. Nevertheless, the effectiveness of additional rate cuts remains unclear, as weak demand for lending largely reflects low consumer and business confidence.

We expect fiscal support to play the key role in addressing challenges to growth, but such support will likely be provided incrementally and calibrated to downside risks to the economy. We project the general government deficit will widen further, from our already elevated forecast of 7.1% of GDP in 2024, keeping government debt/GDP on an upward path.

The sovereign’s debt trajectory remains an important sensitivity for China’s ‘A+’/Negative rating. The sovereign rating is a key support driver for many issuer ratings in China.

Fitch forecasts China’s growth to slow to 4.3% in 2025 from 4.8% in 2024, but the government’s more supportive policy stance should bolster corporates’ revenue in various sectors despite weak consumer sentiment. Sectors such as aerospace, automotive, biotechnology and advanced electronics have benefitted from increased investment and manufacturing upgrades. However, greater US trade barriers are a risk for the technology hardware sector.
Source: Fitch Ratings

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