Trump 2.0 Sparks Limited Response from China - Why and What's Next?

Traders had initially expected that the authorities would roll out extensive stimulus measures to counter potential economic headwinds at the early November National People’s Congress Standing Committee meeting. However, the outcome failed to meet expectations, with traders disappointed at the lack of demand-side initiatives.

Last Friday, on the day the NPC meeting concluded, the CN50 and Hang Seng Index saw notable pullbacks of 5.4% and 4.9%, respectively. The selling pressure on the Hang Seng continued to build, pushing the index below the 20,000 mark, the May high of 19,790, and the 50-day moving average. This decline suggests limited obvious technical support in play, although the 61.8% Fibonacci Retracement level of the late September rally at 19,355 may get some focus. 

Once again the market built expectations about the prospect of definition and substance in stimulus that could lead to demand and reflation, and while policymakers over-delivered on news of the debt swap, the market heard very little on measures that will drive animal spirits – with an impending ugly negotiation still to come, the buyers have given up and the sellers are able to move prices lower with ease.

This prompts fundamental questions: Why have policymakers, despite knowing the market’s expectations, delayed addressing core issues like domestic demand and consumption? How effective will the newly announced fiscal stimulus be in driving economic growth? And when can we expect the next turning point?

Policy Focus: Local Debt Mitigation

The Ministry of Finance’s RMB 12 trillion debt swap plan unveiled at the early November meeting aims to alleviate local government debt. The plan has three key components: allowing local governments to issue RMB 6 trillion in special bonds over three years to swap implicit debt; issuing RMB 4 trillion in local special bonds over five years for debt mitigation; and repaying RMB 2 trillion of implicit debt related to housing renovation starting in 2029.

While some market participants were disappointed by the focus on debt restructuring rather than consumer stimulus, I believe this prioritization reflects strategic judgment.

The local debt issue has been persistent, straining basic expenditures in certain regions. Without a solution, challenges such as reduced wages for public servants, over-taxation, and overdue payments to businesses would likely worsen, further limiting local government's ability to tackle broader economic and consumer issues. Addressing local debt, therefore, is an urgent and essential foundation.

Additionally, the plan’s focus on swapping high-interest, short-term debt for lower-interest, long-term debt will save at least RMB 600 billion in interest payments, easing repayment pressures and bolstering the local government's capability to sustain economic support in the long term.

Meanwhile, initial results from previous stimulus measures are evident. Although the CN50 has pulled back 20% from its October 7 peak, it remains significantly higher than before the September announcement of monetary easing policies. Coupled with the government’s promises to support the stock and property markets, meeting the 5% growth target this year appears feasible. In light of this, holding back on further stimulus now seems reasonable, as excessive stimulus could exacerbate debt burdens and hinder long-term recovery.

In my view, policymakers are not neglecting consumer stimulus but are instead taking a more nuanced approach. Rather than pushing for rapid, short-term growth, China is focusing on greater market stability and more sustainable development.

Trump’s Re-election: China Keeps Options Open

With Trump’s re-election now priced into the market, attention is shifting to his cabinet appointments, which will heavily influence his administration’s approach to China.

Following the return of trade protectionist Robert Lighthizer as U.S. Trade Representative, markets have ramped up bets on stringent tariff policies, strong dollar demand, and inflationary pressures. However, Trump’s nomination of Elon Musk to lead the Government Efficiency Department may be a positive for China, given Musk’s commercial interests in the country.

Now, all eyes are on the Treasury Secretary pick, which is expected by the end of the month. Scott Bessent, a leading candidate, is known for favoring reduced Federal Reserve influence and adopting a neutral approach toward China. Bessent may advocate for pragmatic economic cooperation while maintaining competitiveness in areas like technology and intellectual property.

The timing of potential tariffs on China may depend on whether Republicans take a House majority. If a “red wave” occurs, Trump would likely prioritize domestic legislative reforms before focusing on foreign policy. Otherwise, his ability to advance domestic initiatives could be limited, potentially prompting him to expedite trade policy changes toward China.

Given the uncertainties surrounding Trump’s cabinet and Congress, maintaining policy flexibility and keeping debt and deficit levers as negotiation tools appear to be China’s preferred approach over direct large-scale stimulus.

Key December Meetings

If the U.S. and China find common ground on tariffs, it would be a win-win outcome. If not, two December meetings — the Politburo and Central Economic Work Conference — are crucial as they will set the tone for China’s economic policies in 2025.

Several issues were not fully addressed, including a potential 3% GDP fiscal deficit adjustment, property support, and bank recapitalization. If necessary, China may increase the fiscal deficit above 3.5% of GDP, boost social welfare, expand affordable housing, and issue RMB 1-2 trillion in special bonds to shore up bank recapitalization.