China Injects 10 Trillion Yuan to Combat Economic Woes

China has recently initiated a 10 trillion yuan injection to mitigate its economic struggles. However, it faces potential risks such as a decline in economic growth below 5% and new tariffs if a second Donald Trump administration is established. This scenario may compel Beijing to pursue further stimulus measures as early as next year.

A report by UBS indicates that additional stimulus will be necessary to navigate domestic and external challenges, especially once the details of Trump's tariff plans are disclosed. UBS estimates that a second Trump administration could lead to an average 20-30% increase in US tariffs by mid-2025, predicting that China will respond with a multi-year fiscal expansion.

Should growth dip below 5%, UBS forecasts a robust response, with a projected GDP growth rate in mid-4% for China by 2025.

The news follows the National People's Congress Standing Committee's announcement of a multi-year local government debt resolution plan worth 10 trillion yuan. Although the size of the plan matched expectations, UBS noted a lack of additional measures to stimulate consumption and property markets, leaving investors dissatisfied.

Uncertainty surrounding U.S. trade policies and China's stimulus measures is expected to negatively impact Chinese stocks. UBS has revised its outlook for the iShares MSCI China ETF (NASDAQ: MCHI) to 67 by June 2025 and 74 by the end of the year, down from earlier predictions of 76 and 79.

Despite potential tariff-induced market volatility, UBS suggests that major market declines could offer buying opportunities as stronger policy measures are anticipated. Furthermore, the bank forecasts the USD/CNY exchange rate to rise to 7.3 by the end of 2024 and to 7.5 in the latter half of 2025.