China Economic 2025
Historically, economies have three main ways to escape a downturn:
Stimulating domestic consumption and demand (e.g., the U.S.) – This involves lowering borrowing costs and printing money to avoid deflation.
Manufacturing and export-driven growth (e.g., China) – Selling goods to overseas markets to generate profits.
War as a means to shift economic pressures (e.g., Germany during WWII).
Stimulating Domestic Demand: Challenges and Policy Options
When discussing demand-side stimulus, it's crucial to recognize that supply-side measures like real estate and infrastructure investment are no longer viable. Many inefficient capacities must be phased out, leaving demand-side stimulation as the only option. However, the real estate sector is a major issue.
Housing accounts for 70% of household wealth, and property prices have fallen by over 30% in many regions. Therefore, stabilizing housing prices is a prerequisite for boosting domestic demand—otherwise, no amount of stimulus will work.
There are two ways to stabilize housing prices:
Lowering debt costs – Buy back government bonds and reduce reserve requirements.
Massive monetary expansion – Reduce debt burdens.
Currently, the government intends to print more money, but borrowing demand remains weak, and the shortfall in land sales revenue is too large. As a result, even if money is printed, it is unlikely to cause inflation but will instead be used to sustain basic livelihoods. The direct consequence of this dual approach will be a depreciation of the RMB to 7.5–7.6 per USD, though not a collapse. This also serves to counteract trade war pressures. Therefore, I believe holding USD and buying U.S. Treasury bonds is not a bad idea. Capital should flow to where it is best utilized.
Real Estate Adjustments and Their Economic Impact
The real estate market is still overvalued and needs time—perhaps around three years—to adjust to reasonable levels. Although market expectations have shifted, many people are still unwilling to accept reality, comparing current prices to their purchase costs. This mindset must change, and real estate must ultimately return to its commercial fundamentals—meaning rental yields must be compared to government bond yields. If a property yields less than 2%, it is overpriced. High listing prices mean nothing without transaction volume. In cases of foreclosure or liquidity crises, real market prices become evident.
During this adjustment phase, consumer spending is unlikely to see significant growth. Consumption can only recover once housing prices stabilize and supply-demand balance is maintained for a period.
In the long run, household wealth must find alternative investment destinations instead of sitting idle in bank accounts. However, the stock market requires both quality enterprises and competent managers, which are currently lacking.
Consumption Trends: Lessons from Japan
I do not have an optimistic outlook on consumption, particularly discretionary spending such as luxury goods, cosmetics, and medical aesthetics. Interestingly, when the economy is strong, it becomes harder to profit from women’s consumption because their income grows, making them less dependent on spending for perceived value.
The education sector has been restricted, and birth rates are declining, making children's spending a weak segment.
Big-ticket items, such as home appliances and automobiles, might perform relatively better due to government subsidies. Without subsidies, demand would be even weaker.
I believe China's consumption trends will resemble Japan’s—low desire, high value-for-money products, and a focus on intrinsic value, rather than being driven by internet celebrity trends.
For instance, the domestic NEV (new energy vehicle) market replacing luxury brands like BMW, Benz, and Audi (BBA) is a high-value alternative rather than excessive consumption. Other promising sectors include organic food, beverages, anime, and gaming, as they provide entertainment at little to no cost.
Thus, I remain bullish on Tencent and NetEase ($00700.HK), as their valuations are reasonable, their business models are well-established and monopolistic, and they have strong monetization capabilities.
Manufacturing: Parallel Strategies of Going Global and Domestic Substitution
I favor companies that pursue both overseas expansion and domestic substitution. However, "going global" does not just mean exporting products—it means exporting production capacity, including capital, technology, and labor, and acquiring experience in dealing with foreign governments.
Such firms tend to be large enterprises with exceptional product competitiveness.
Fuyao Glass (600660.SH) is a well-known case of successful manufacturing expansion in the U.S., and I remain bullish on its prospects.
BYD’s (002594.SZ) overseas expansion is another key area of interest. Its current strategy is correct, but execution needs to be monitored.
Transsion (Tecno) is very popular in Africa and could be another major player to watch.
Defense Industry: Cautious Optimism
The defense sector is worth monitoring but not holding large positions. If China were to pursue the third path (war)—which is unlikely, given past failures—then military companies would be the only rising stocks. However, current valuations are already high, largely due to speculation.
I am looking for defense stocks with reasonable valuations and clear order books. Recommendations are welcome.
Biopharma and Medical Equipment: Limited Opportunities
Chinese innovative drugs have limited domestic market potential due to government budget constraints.
Overseas expansion could work, but the field is too specialized, making long-term holdings difficult.
Medical equipment substitution is another area to watch, given China's push for self-reliance.
The healthcare insurance system is likely to undergo reforms, as excessive spending on pharmacies cannot last forever (e.g., entire streets lined with pharmacies relying on insurance payouts).
High Dividend and Cyclical Plays
Dividend-paying stocks such as oil and shipping companies could be attractive due to rate cuts. If a stock offers a 6% dividend yield, it’s appealing—but only if the business is safe. Unfortunately, many of these are cyclical stocks, meaning without a deep understanding, one might only capture dividends while losing principal.
This explains why many investors prefer bank stocks or tobacco companies over oil stocks.
New Energy Vehicles: Selective Opportunities
The NEV sector has trading opportunities but few long-term holds.
The first successful wave focused on family-friendly models (Li Auto).
The next wave could involve Xiaomi’s entry or key components (motors, radars, etc.).
However, I do not have high expectations for Xiaomi (1810.HK) or Seres (601127.SH).
Xiaomi’s valuation is comparable to BYD’s, yet it has no EV profits.
Seres' valuation is uncertain and depends on next year’s M8/9 deliveries. If sales reach 300,000 units, generating over 10 billion RMB in profits, it would be a fair valuation.
The 30-50 million RMB SUV segment is largely uncontested, with Li Auto and BBA as the main competitors. Its market penetration and new MPV/ sedan models will determine future success.
- David Z
