A raft of reciprocal tariffs between China and the US could bruise China’s export revenues in the short term. But its domestically focused economic engine and shrinking dependency on US trade should minimize fallout in the long run.
We think this bodes well for China’s domestic A-share equities, which continue to offer compelling value and diversification benefits relative to developed market stocks.
A-shares seemed initially unscathed by tariff turmoil. The CSI 300 Index of Chinese onshore stocks retreated just 0.6% the day after President Trump’s sweeping tariff announcements on April 2. While the market has been volatile since then, performance has been relatively resilient versus developed markets through late April. As we see it, this suggests investors feel that imminent Chinese policy moves and its changing global trade landscape can help Chinese companies overcome anything the US throws at them.
Winds of Change: China Shifts to Non-US Trade Partners
Why is the Chinese market relatively resilient to extremely high US tariffs? The answer lies in its ability to manage through on the macro and company levels. Chinese companies have done it before, by carefully maneuvering around 2018’s Trump 1.0 tariffs. As a result, we’ve seen a significant shift in China’s trade dynamics that has made the world’s second-largest economy less reliant on US markets in recent years.
China’s US-bound goods now comprise just 15% of everything it ships and account for 3% of GDP, less than half the peak level of 2007 (Display).
As a result, Chinese firms are likely to accelerate the shift to manufacturing outside of the country to mitigate the impact of the tariffs and preserve its US -related revenues. Chinese company exposure to US-based revenues has dropped to an historical low of 5%, based on MSCI market-cap weighted averages as of January 30, 2025. Other markets’ revenue exposures are as high as 45% (Taiwan), 28% (South Korea) and 24% (Japan), so a US-China tariff war could seem much less threatening by comparison.
Taking on Tariffs from Within
Chinese policymakers have been very attuned to the shifting trade environment. In our view, China’s central bank has expected higher US tariffs for some time and quietly laid plans to offset their potential impact. In fact, policymakers likely reserved some stimulus in anticipation, which we think now leaves room for intense easing or fiscal spending, especially to grow consumption—a key pillar of China’s economic stability.
Policy-led inducements to spend and invest domestically should be effective because Chinese consumers are big savers. Government spending and rate cuts also tend to boost Chinese stocks, onshore shares especially. This happened in three of five stimulus/easing cycles since 2005, each producing 50% to 100% trough-to-peak market gains (Display).
Trade May Pause, But Chinese Equities Carry On
Most listed Chinese firms are domestically focused, so it’s business as usual for them. While the impact of a slowdown in exports is real, it’s unevenly distributed around the country, and the hardest-hit areas should be helped by domestic policy efforts.
China’s onshore bourse is extremely diverse across industries, with reasonably wide dispersion and a relatively low concentration in the top five stocks. What’s more, retail investors account for 85% of all trading, according to the Asian Bureau of Finance and Economic Research. We believe retail investors are relatively less exposed to negative tariff sentiment, especially compared to institutional investors, who in contrast dominate transactions in other major exchanges. And since retail-dominated trading is volatile and follows popular trends, it often creates market inefficiencies that active, research-driven investors can exploit to drive excess returns.
Which Sectors Look More Resilient?
To be sure, Chinese A-shares have been volatile in recent years, which tends to come with the territory. But areas of opportunity continually surface, not just above the usual volatility but amid today’s highly tense atmosphere as well.
We think Chinese consumer discretionary and financial stocks continue to offer quality and good value. Conversely, industries with high exposure to US markets will feel more short-term tariff pain. These include home appliance manufacturers, microchip and technology hardware makers—assuming exemptions don’t last—and auto parts, steel and pharmaceutical providers. Yet select firms will be relatively unfazed. Take electric vehicles, a prime example of Chinese manufacturers practically skipping US consumers altogether for growth opportunities elsewhere. Some Chinese firms will also benefit from the country’s retaliatory tariffs on US companies. We could see gains in market share as onshore consumer preferences shift from US products to domestic suppliers.
Investor sentiment beyond China’s borders is improving, too. Global allocations to Chinese stocks worldwide have climbed to 7% as of March 31, 2025, according to Emerging Portfolio Fund Research Global. And since these allocations are well below historical peaks, we think the market could see more inflows.
Chinese Stocks Are a Good Diversifier
While the outlook for global equities remains very cloudy, we think selective investors can find some silver linings. In this environment, we think it’s important to reevaluate regional exposures, especially when technology-led US growth stocks dominate so many portfolios.
Chinese equities offer clear diversification benefits. Return patterns of A-shares have shown low correlation to those of US, Europe, Japan and other developed countries over the last decade (Display). Bottom-up, active stock selection is key. But we think Chinese equities as a group are an attractive complement to a diversified equities portfolio, tariffs or no tariffs.
The outcome of the US-China trade war is fluid, and AB economists project a 2% hit to China’s 2025 growth as a base-case scenario. Tariffs by nature inflict damage, but we believe Chinese investor sentiment will ultimately depend more on domestic factors than external forces.
So far, investors seem relatively calm under the circumstances. We see this as a positive sign of recognition that strong Chinese company fundamentals don’t always hinge on US market access, but rather on quality management, market competitiveness, cash flow and solid balance sheets. Tariffs may add risk factors to stock selection, but we believe active investors can stay ahead of an evolving Chinese equity market.
The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.
MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.
The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
© AllianceBernstein
More Asian/European Markets Topics >
