How China’s 2025 policies could affect the global stock market

China’s economy has been described as a “ticking time bomb” for the global stock market. Weak GDP growth, rising youth unemployment, declining foreign investment, and a massive housing bubble have put policymakers in a bind.

The Chinese economy began turning heads in 2021 when Evergrande Group, the country’s massively indebted property developer, collapsed. Evergrande was unable to pay the more than $300 billion in debt it owed and failed to secure a restructuring plan to keep it alive.

Just when the dust appeared to have settled, two years later an under-the-radar Chinese bank defaulted on its payments, sparking concerns that the country was facing its own “Lehman Moment” similar to the U.S. financial crisis in 2008.

That bank was Zhongrong International Trust, a financial services company with $108 billion in assets under management.

In the months that followed, it became clear that Zhongrong’s default wasn’t an isolated incident. Several of the country’s largest banks reported a spike in bad loans.

Chinese policymakers have promised to unleash massive stimulus to prevent the property crisis from spilling over to the rest of the economy. So far, this has amounted to multiple rate cuts, more infrastructure spending, and a stock market rescue package valued in the hundreds of billions.

However, experts generally agree that the stimulus measures weren’t enough to dig China out of its economic hole.

The “Chinese government repeatedly overpromised and underdelivered” on stimulus in 2024, said Charles Schwab managing director Jeffrey Kleintop.

“The initial euphoric response to the government’s turnaround from the stock market has been replaced by disappointment, and Chinese officials have scrambled to announce additional goodies,” wrote Jeremy Mark, a Nonresident Senior Fellow with the Atlantic Council.

“The public skepticism exemplified by China’s 200 million stock market participants has deep roots after several years of economic mismanagement,” said Mark.

That skepticism isn’t just limited to China but is reverberating around the world. Whether in Asia, Europe, or North America, investors are keenly watching the People’s Bank of China (PBOC) and Ministry of Finance for clues about what comes next.

Against this backdrop, China’s policies are likely to significantly impact global stocks, particularly through the lens of fiscal stimulus, the U.S.-China trade war, and Beijing’s exchange-rate policy.

Awaiting stimulus

Although investors were left disappointed with China’s initial stimulus efforts, financial experts generally agree that the money printer will turn on again this year.

As Charles Schwab’s Kleintop noted, “There is the potential for a big stimulus program with enough details that may brighten the markets’ outlook for stabilization in housing and improvement in consumer confidence in 2025.”

According to Mi Yang, the head of research at property consulting group JLL, government stimulus will have a noticeable impact later this year. However, Yang cautioned that it will probably take time before the economy sees a significant boost.

Just how much stimulus policymakers will unleash likely won’t be known until March, when the National People’s Congress is convened. At this meeting, government officials will hash out China’s annual growth target, government spending initiatives, and the size and scope of stimulus measures.

In the meantime, Finance Minister Lan Fo’an sent a strong signal that more help is on the way. “The central bank still has significant room for increasing debt and expanding the deficit,” Fo’an said.

Brendan Ahern, the CIO of China-focused ETF provider KraneShares, believes Beijing’s stimulus measures will trickle down into corporate earnings and economic data, pushing domestic stocks higher in the process.

If the stimulus measures succeed, they could dramatically impact investor sentiment overseas.

After all, China is still the world’s second-largest economy, accounting for nearly 17% of global GDP. The potential news of a stabilizing China could influence everything from commodity prices to foreign direct investment and even global trade flows.

Trade war response

Another way Chinese policies will influence global stocks this year is in Beijing’s response to the U.S.-led trade war.

US President Donald Trump has already announced plans to impose an additional 10% tariff on Chinese goods. Although it’s not entirely clear how Trump will expand the trade war, the Holland & Knight law firm believes he could implement tariffs already enshrined in the Trade Act of 1974.

Section 301 of the Act is “designed to address unfair foreign practices affecting U.S. commerce,” which Trump has already accused China of doing.

Meanwhile, Congress is already mulling new legislation that would automatically increase import tariffs on goods coming from China.

Perhaps the most ironic part of the trade war is that America, not China, could end up getting the short end of the stick.

The International Monetary Fund forecasts that the trade war could reduce China’s GDP by 0.2% this year. The impact will likely be felt doubly hard in the U.S., whose loss from the trade war could reach 0.4% of GDP in 2025 before reaching 0.5% next year.

A full-blown trade war “means China-related assets will still be pressured by geopolitics and U.S. domestic policies,” said Natixis economist Gary Ng.

However, it won’t just be China-related assets that take a hit.

The New York Fed analyzed U.S.-China relations during Trump’s first term and determined that “Tariff announcements caused large declines in U.S. stock returns.”

U.S. stocks plunged by a cumulative 11.5% on days with tariff announcements, the researchers said.

On the other hand, it’s unlikely that China will let the United States dictate its global trade policy. 2025 marks the 10-year anniversary of Beijing’s “Made in China 2025” initiative, which seeks to revamp the country’s high-tech industries to secure the nation’s leadership status.

Through the initiative, China intends to dominate the electric vehicle, alternative energy, telecommunications, and artificial intelligence industries, among others.

Exchange-rate policy

China can also influence global stocks through its exchange-rate policy, which is often referred to as outright currency manipulation.

The U.S. and other countries have long complained that China purposely devalues its currency to boost its exports and trade surplus against the world. For example, the U.S. Treasury has repeatedly urged China to allow its yuan currency to trade more freely in global markets.

However, as the Brookings Institute explains, those calls have largely fallen on deaf ears because “Chinese officials see the exchange rate—and prices and market mechanisms in general—as tools in a broader development strategy.”

Brookings said the key goal of this strategy is to “make China a rich and powerful modern country. "

As Reuters reported, investors are betting that China will allow the yuan to slowly depreciate ahead of the expected trade war with Washington.

David Roche, a strategist at Quantum Strategy, called this an “orderly” decline.

“There is a compelling logic” to letting the yuan depreciate slowly, said Rabobank’s head of FX strategy, Jane Foley. “China’s economy is already weak, inflation is low, and it will have to position itself for Trump tariffs.”

However, currency devaluation is often a double-edged sword, especially for a country with the magnitude of China’s problems. As Bloomberg reported, a rapid depreciation of the yuan could lead to capital outflows from China, dragging the currency even lower.

This is why the People’s Bank of China has walked a tightrope in explaining its exchange-rate policy.

“We will resolutely prevent the risk of the exchange rate overshooting, ensuring that the yuan exchange rate remains generally stable at a reasonable, balanced level,” said Pan Gongsheng, the PBOC’s governor.

Still, experts like Viraj Patel believe China has already made up its mind on the matter.

“For any macro trader, this is a case of when and by how much yuan weakens in the first half of [of 2025]—and not so much if,” Patel, a strategist at Vanda Research, said. “When Chinese authorities start ‘mulling’ things over, we all know what comes next.”