“The sudden weakening of the US dollar overnight given news that the incoming US administration may pare back on import tariffs does not really change the below story (in fact the largest appreciation came from the euro and not so much the RMB). China’s currency is under pressure for domestic reasons and not only because of Trump’s policies.”
China’s Domestic Struggles: PMI Data and Labor Market Concerns
December’s Caixin private sector PMI data raised concerns about the effectiveness of Beijing’s stimulus measures targeting consumption and domestic demand.
The Caixin Manufacturing PMI fell from 51.5 in November to 50.5 in December. Significantly, staffing levels declined for the fourth consecutive month as overseas demand weakened. The Caixin Services PMI painted a similar picture, with service providers cutting staffing levels for the first time since August. Concerns about international trade and competition weighed on sentiment, leading to job cuts.
China’s Labor Market and Consumer Sentiment Crucial for Consumption
Declining employment levels and muted consumer confidence add to Beijing’s uphill battle to stimulate the economy. Stable labor market conditions and falling youth unemployment could be crucial for Beijing’s stimulus measures to boost consumption and domestic demand. The youth unemployment rate stood at 16.1% in November 2024, well above the 5% national unemployment rate.
Labor market conditions and geo-political tensions also impact consumer sentiment. Consumer confidence dropped near to historical lows in Q3 2024. Weaker consumer confidence may curb private consumption and demand. Economists believe Beijing must boost confidence through the labor market and implement policy measures targeting household income.
US-China Relations and Economic Implications
US-China relations could be crucial to China’s economic recovery. Improving relations may ease trade tensions, boosting private sector sentiment. Improving sentiment may drive job creation, supporting consumer confidence, spending, and demand.
However, the Biden administration continued making waves on January 6, targeting Chinese companies in its final days. The US Defense Department announced the inclusion of Chinese tech giants on a list of companies that work with China’s military, known as the Section 1260H List.
The Section 1260H List now includes prominent global names, including Tencent Holdings Limited, COSCO Shipping Holdings, and China National Offshore Oil Corporation’s CNOOC China Ltd.
Companies on the list could face US sanctions and the cold shoulder from US firms to avoid government scrutiny. During Trump’s first term, Huawei faced global challenges following the US stating that the tech firm acted on behalf of the Chinese government.
The incoming administration’s first moves could give insights into Trump’s plans for China. In December, Trump appointed ex-US Senator David Perdue as the Ambassador to China. Perdue previously lived in Hong Kong and worked in China, well-positioned to improve US-China relations.
Trump also softened his tariff threat from 60% to 10%. These pre-inauguration moves could suggest the Trump administration plans to improve US-China relations.
However, China’s involvement in BRICS remains a hurdle. In September, Trump warned nations against dropping the US dollar, threatening 100% tariffs on goods from BRICS nations. China is a vocal advocate of BRICS’s plans to shift away from the greenback.
Hang Seng and Mainland China Markets Under Pressure
The prospect of a US-China trade war has rattled markets in Hong Kong and mainland China. Year-to-date, the Hang Seng Index is down 3.74%, while the CSI 300 and Shanghai Composite have declined by 4.30% and 4.62%, respectively.
The losses came despite Beijing’s efforts to bolster the economy, underscoring sentiment toward the potential impact of a US-China trade war on China’s economy.