China’s improving profits may help soften tariff blow for stocks
The stellar rally in Chinese stocks that began in mid-January with the emergence of DeepSeek’s AI model has cooled in recent weeks as focus turns to tariffs
[NEW YORK] China’s outlook has brightened after a campaign to revive consumption delivered a strong earnings season, one that may offer local stocks a much-needed cushion as they brace for US tariffs.
Fourth-quarter earnings reported by members of the MSCI China Index beat estimates by 5.1 per cent on a weighted average basis, up from 1.8 per cent in the prior quarter, according to data compiled by Bloomberg Intelligence.
The results indicate that Beijing’s efforts to cultivate consumption as a key growth engine are starting to pay off, raising hopes for a tech-led stock rally to expand. They also add to new signs of a broader recovery in the world’s No 2 economy, putting China in a better position as Donald Trump escalates a trade war.
“The better-than-expected fourth-quarter earnings can be attributed to the stimulus blitz that was announced at the end of the third quarter,” said Marvin Chen, a strategist at Bloomberg Intelligence. “China tech giants spanning the consumer discretionary, tech, and communications sectors drove earnings surprise.”
Confronting persistent housing woes and deflationary pressures, Chinese policymakers unveiled a central bank-led stimulus blitz in late September, before rolling out more measures from voucher programmes to strengthening the social safety net.
Major consumer tech firms were among the top beneficiaries as the Chinese consumer started to loosen the purse strings, with the likes of JD.com, Alibaba Group Holding and Tencent Holdings all reporting consensus-beating results.
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The earnings boost further fuelled investor optimism towards the sector after Chinese startup DeepSeek redefined the global artificial intelligence (AI) landscape with the rollout of its cheaper model earlier this year.
Meanwhile, electric vehicle manufacturers such as BYD that enjoy hefty government subsidies for buyers also delivered above-estimate earnings.
“We believe this appearance of long overdue earnings inflection is the direct result of aggressive cuts to earnings estimates over the past several years combined with diligent corporate self-help efforts to enhance earnings and shareholder returns,” Morgan Stanley analysts including Laura Wang wrote in a note last week, when the bank raised its targets for several Chinese stock indexes.
To be sure, the reciprocal tariffs expected to be announced by Trump on Apr 2 remain a big overhang over the trajectory of Chinese firms’ earnings recovery.
Based on an effective US tariff rate of around 30 per cent and assuming a stable exchange rate, the levies are expected to have a roughly four- to five-percentage-point impact on 2025 earnings growth for MSCI China’s members, according to Homin Lee, a senior macro strategist at Lombard Odier Singapore. “If Trump raises tariffs even more on China, the impact could reach double digits,” he said.
The stellar rally in Chinese stocks that began in mid-January with the emergence of DeepSeek’s AI model has cooled in recent weeks as focus turns to tariffs. MSCI China has lost 6.7 per cent from a Mar 18 high but remains up more than 15 per cent for the year.
Similarly, the Hang Seng Tech Index has shed 11 per cent from Mar 18’s peak. It still boasts a 21 per cent year-to-date gain.
Morgan Stanley’s analysts appear less concerned, arguing that MSCI China is relatively better positioned against potential further US tariff hikes versus the broad emerging market (EM) on an incremental basis. “Current tariffs imposed by China on US imports suggest limited room for hiking based on the Reciprocal Tariff Scheme, and MSCI China has a mere 3 per cent revenue exposure to the US, the lowest among the US’s 10 largest EM trading partners,” they wrote in the note. BLOOMBERG
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