China 2025 – “The Year of The Snake”: Renewal, or Repeat?

China welcomed the ‘Year of the Snake’ on January 29, 2025, as the Chinese New Year celebrations began. The Year of the Snake is said to symbolise wisdom, intuition, transformation, and renewal. This theme of renewal is particularly relevant when considering China’s economic outlook, as the country navigates challenges from 2024 and implements new policies to stimulate growth in 2025.

Last year, China's economy fell short of expectations. This was due to reduced consumer spending and a slowdown in the property market. Inflation remained low, reflecting weak growth in the money supply (i.e. the amount of money circulating in the economy).

In the latter half of 2024, the government announced significant domestic policies aimed at boosting the economy in 2025. These measures included:
•    Lowering interest rates and bank reserve requirements: Making borrowing cheaper for people and businesses and allowing banks to lend more money.
•    Supporting banks and the property market: The government allocated funds to strengthen major banks, helping them to lend more money. They also supported the property market, making it easier to buy, sell, and build new homes.
•    Encouraging spending:  Policies were put in place to boost consumer spending and adjust how tax money is shared between central and local governments, to ensure adequate funding for services and community support.

Looking ahead, we believe China's economic growth will remain solid in the short-term through 2025.  We forecast an expected growth rate of around 4.5% per year, which is a little higher than the average year. This positive short-term outlook is supported by ongoing government and central bank policies.

As for inflation, we expect it to stay low at around 0.5% in 2025. This is down to efforts to reduce high debt levels in local governments, the property sector, and businesses. However, such low inflation is a concern for China given its significant debt problem, a longer-term issue requiring continuous and substantial policy support.

Overall, our short-term outlook for Chinese financial assets, like Chinese equities, is positive for 2025. Chinese companies currently appear undervalued, but large-scale policy support is crucial for this potential value to be realised. If the policy support provided by the government is weaker than expected or there are missteps in the types of policies enacted, the negative impact on the Chinese stock market and returns could be significant. Given these risks we are comfortable holding an exposure to China broadly in line with global equity indices. Catalysts to change this stance could be a material change in the geopolitical situation for China, substantial policy support improving the inflation situation, or material valuation changes from current asset pricing.

Source: FactSet
Inflation is represented by CPI Core (excluding food and energy)

The Noise

• Two of the world’s largest central banks, The US Federal Reserve (Fed) and the European Central Bank (ECB), made interest rate decisions this week dictating the price of short-term borrowing for America and Europe respectively. The Fed held interest rates steady, within their 4.25-4.5% level, in line with market expectations. Fed Chair Jerome Powell said they were ‘not in a hurry’ to continue cutting rates as inflation remains somewhat elevated above the central bank’s 2% target. In Europe, as expected the ECB cut interest rates by a quarter point, to 2.75%. These actions reflect the relative strength of the US economy versus the eurozone. 

• The UK faces a 26% increase in water bills in 2025. This is the largest annual increase in utility bills since utilities were privatised in 1989. According to Ofwat (the national water regulator), people can expect to pay an average of £604, though some face larger increases than others. For instance, Southern Water customers could see an average increase of £224, rising an astounding 47% year-on-year. This comes as the regulator calls for  an urgent need for investment in aging water and sewage systems. Rising utility costs are part of a larger strategy of a £104bn investment in UK utility infrastructure by 2030.  ​

• The US economy grew 2.3% in the last quarter of 2024. Whilst the recent GDP figure was weaker than expected, it still indicates a strong US economy. The weakness was driven by poor business spending but balanced by robust consumer spending. This strong US growth data aligns with the Fed’s outlook for a slower rate cutting cycle than previously expected. Many economists expect US growth to outpace European peers, as President Trump has pledged to reduce taxes, supporting robust US growth looking forward. Uncertainty remains, however, as according to the International Monetary Fund (IMF), other policies around trade tariffs could put downwards pressure on US growth by up to 1.2%. 

The Numbers

GBP Performance to 30/01/2025

Source: Bloomberg, data as at 30/01/2025

The Nuance

This week witnessed a bout of equity market volatility, with US markets falling over 3% on Monday but recovering to be down just 1.4% by Thursday's close. The market was shaken by news around DeepSeek, a Chinese AI startup founded in May 2023, which gained significant attention by overtaking OpenAI's ChatGPT as the most downloaded app on the Apple App Store.

But how did an alternative AI model lead to technology stocks falling? Essentially, DeepSeek created an AI chatbot, like Chat GPT, but for around 1/20th of the price to train, while using less expensive semi-conductors/chips (the hardware which powers AI). For context, their model cost c.£5mn versus it’s American peers costing over £100mn. This cost-effective and high-performing AI model innovation reframed the markets view on the future demand for AI related infrastructure. Thus, the market repriced in this lower forward-looking demand, and many big US tech companies were impacted.

While the entire semiconductor sector was impacted, Nvidia contributed significantly to the market impact, as one of the world’s largest and most advanced AI chip makers. With the short-term demand for its superior semiconductors potentially vulnerable, its share price sharply fell by 17% on Monday, though it is worth noting the performance recovered by 5% by Thursday’s close. For the overall US market, it is also important to note that while the market movements on Monday were meaningful, this fall only takes us back to levels of around 10 days ago.

With the potential for much greater efficiency for AI training, the case for future energy demand from AI-focused datacentres was tested. As a result, energy and energy related infrastructure stocks fell significantly. For the environment, however, this may be a silver-lining: AI adoption could have a smaller climate impact than previously anticipated.

This specific stock and sector impact emphasises the importance of diversification in the investment process, as unexpected developments can have significant adverse effects on specific stocks or sectors.

Looking ahead, the introduction of a cheaper, open-source AI model is expected to increase overall demand for computing resources and accelerate investment spending. Ultimately, this could be seen as positive for speed of progress and adoption which should support large tech companies and other software firms. In essence, while there was a short-term shock to the US market this week, the likelihood of faster and cheaper AI adoption and associated productivity benefits suggests a more constructive outlook for the broader market and the economic impact of faster AI innovation.
 

The Niche

A fun financial markets fact of the week

How old are banks? The world’s oldest bank is 553 years old! The Monte Dei Paschi di Siena (or ‘Magistracies of the Republic of Siena’) was founded in Tuscany, in Italy in 1772. It was founded on a principle to give aid to underprivileged people, and is still operates today, as one of the leading private Italian banks.