The National People’s Congress convenes this week in China. And tomorrow marks its most important day…
That’s when officials set the nation’s agenda and the desired growth rate for the Chinese economy over the coming year.
Chinese stocks have rallied strongly in anticipation of this year’s assembly. A key part of that has been expectations of another big stimulus package.
The aim is to reignite growth. China is still reeling from its real estate crash. Many companies and municipal bodies are still struggling with a mountain of debt.
You can see the impact of previous stimulus packages in the iShares China Large-Cap ETF (FXI)…
iShares China Large-Cap ETF (FXI)
Source: eSignal
And the Chinese government means business. Even former tech darlings like Jack Ma of Alibaba have been brought back into the fold.
That’s because the Chinese know they are in a deep battle against the U.S. for supremacy in the artificial intelligence (AI) space.
The success of DeepSeek’s AI model encouraged China that U.S. Big Tech is far more vulnerable than markets appreciated.
So today, let’s look at the factors that could bring additional volatility into this competition…
Upping the Pressure
China’s plan to return to robust growth is not without risks.
To achieve their desired level of growth, they’ll have to spend trillions of yuan. That would put the budget into its biggest deficit in decades.
Plus, the government will also have to rely on a sustained upswing in personal consumption to help push domestic growth.
But many Chinese people are underwater on their real estate investments. So there is no guarantee that they’ll step up to spend.
And the far bigger challenge right now is tariffs… The U.S. represents around 15% of the Chinese export market.
President Trump keeps upping the pressure with higher tariffs to get the U.S.’s massive trade deficit with China back into balance.
But while some might cheer Trump’s tariffs, I’ve got my doubts…
Stifling Demand
No one wins a trade war. It becomes a case of trying to lose the least…
Because everybody eventually loses.
For the American consumer, tariffs mean higher prices on goods… and thus inflation. Higher inflation means that interest rates remain higher. So a mortgage and personal loans eat up more of your wages.
That lowers domestic consumption. Anyone who wants to purchase cars, fridges, or electronics, for example, might wait to buy.
So far this year, the Chinese market has come out in front – though from a lower base than U.S. markets.
Since this year’s first trading session, FXI has rallied 23% up to its February 26 high. It has risen almost 30% since its January low.
Meanwhile, the S&P 500 is barely at par since the start of January. And the Nasdaq is tracking lower over the same time.
Each time President Trump has confirmed that tariffs will come into effect, the U.S. markets have slumped.
And that’s a noteworthy signal…
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No One Wins
Markets are telling us that import tariffs are bad for stocks… and the economy.
Plus, U.S. stocks are priced for perfection. So they have more to lose than Chinese stocks, which had been stuck in the doldrums until last year.
That’s why I argued at the start of the year that U.S. markets were underestimating the true impact of tariffs.
I said that the economy will weaken as the impact of those tariffs starts to bite.
Most importantly, with the U.S. economy powering along compared to China, I questioned why we would risk upending the cart.
As the U.S. markets start to struggle, the Chinese market has been on a tear.
Of course, like any surge, Chinese stocks risk rallying too quickly, leaving them vulnerable to a pullback.
But longer term, things still have a long way to play out.
That’s why we need to stay cautious in the markets in the coming months. Be a little more conservative with your position sizes than you want to be.
We also need to stay nimble. In a volatile environment, we should be disciplined and take profits when we see them. And we should cut losses just as quickly.
With good risk management in mind, we can weather any rockiness that happens as a result of tariffs and trade wars… and even bank some solid gains on the way.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict