China’s Year of the Snake – a year of renewal and agility?

With snakes symbolising renewal, agility and resilience in Chinese culture, Head of Market Analysis Janet Mui explores why the Year of the Snake is a critical period for China as it tackles economic challenges, technological advancements, and global competition.

A common saying has it that when China sneezes, the world catches a cold. As the world’s second largest economy, largest exporter, and largest commodity importer, its direct impact on the global economy has been significant over the past few decades. But is this influence set to change? Let’s take a look…

China’s prospects in the Year of the Snake

2025 is set to be a symbolic milestone for Chinese ambition and national pride.

Ten years ago, China unveiled a comprehensive industrial strategy named ‘Made in China 2025’ that aimed to transform China from a low-value manufacturing hub to the global leader in cutting-edge technology and innovation.

Fast forward to 2025 and China has largely succeeded – from its dominance in solar panels, electric vehicles and drones, to its advancements in artificial intelligence (AI), most recently through AI disruptor DeepSeek.

‘Made in China 2025’ has proven successful despite U.S. export restrictions, cementing China’s status as a leading strategic rival to the U.S. Now with the acceleration of AI development, the Year of the Snake presents an opportunity for China to evaluate its progress and set new goals for growth.

That said, China faces its challenges, most notably a deflating housing bubble. However, the country’s strong technological dividends – already integrated and enjoyed in everyday life – and its robust national infrastructure, provide a solid foundation for new growth drivers to emerge.

China’s challenges are wrapped in complexity

First, China must uncoil a complex set of challenges. These are both cyclical and structural, as well as domestic and international.

Domestic property

The elephant in the room is the struggling property sector, which has depressed investment and suppressed consumer confidence. Deflation (when prices keep going down) is a threat due to oversupply and a reluctance to spend, as people wait for prices to drop further. The housing market has a significant impact on confidence because if prices rise, owners tend to have more confidence to spend. While home prices and sales declines have stabilised, a sustained reduction in home inventory will take time. Demographic trends, such as a fall in household formation, also pose a long-term challenge to demand.

Consumer confidence

Critical to China’s renewal is confidence, particularly in the economy and job security – the latter being key to unlocking near-term spending power. However, young people face a tough jobs market and rising job insecurity, which threatens their income stability and reduces their desire to start families. This trend is underscored by the government’s decision to stop publishing youth unemployment data and the spread of the ‘lie flat’ attitude on social media; this involves young people putting in minimal effort at work.

Although the Chinese have great potential spending power due to a high savings rate, a reluctance to spend persists amidst falling property prices and economic uncertainty. Research from the People’s Bank of China has indeed shown an increased desire to save.¹

Tariffs

China must also contend with prominent external challenges, such as U.S. President Donald Trump’s imposition of additional 10% tariffs on Chinese products. The potential escalation in trade tensions between China and the U.S. will pose risks to China, but the threat may also prompt it to confront its domestic structural challenges head-on.

The complexity of these challenges demands patience. Despite government stimulus, it’s perhaps wishful thinking that things will turn rosy solely due to that. The view is that there needs to be some bolder and more creative fiscal policies in the Year of the Snake to harness growth and boost the confidence of businesses, consumers, and markets.

How will China untangle itself?

Just as snakes adapt to their surroundings, so must China’s policymakers, who will need to be agile in response to the shifting economic landscape.

A China-U.S. trade war could be damaging, but it could also hasten China’s shift towards a growth model that prioritises domestic consumption over a reliance on exports and investment.

China’s long-standing growth model of fixed investment via infrastructure and property is showing diminishing returns and is unsustainable. While the latest government stimulus package improves the supply and price of credit, the fundamental problem is inefficient capital allocation and risk aversion.

The Chinese authorities have long advocated for a shift in growth priorities to consumption, whose share in GDP (gross domestic product) remains much lower than other major economies. However, China’s cultural emphasis on saving and its limited social safety net, along with a lack of domestic investment options, has contributed to its high savings rate.  

The government’s current consumption support policies have focused on subsidies for upgrades like new white goods or electric vehicles, with limited success. New plans announced at the end of 2024 aim to provide more direct support to families with multiple children and those struggling with extreme poverty. However, markets remain unimpressed at the scale of these measures.

Amidst the crosscurrent of domestic and external headwinds, the risk of rising unemployment is high. The rapid pace of AI development and potential labour displacement could exacerbate uncertainty, threatening social stability and consumer confidence. This perfect storm of challenges may serve as a catalyst for China to take bold action.

Can the Chinese market get its bite back?

The tentative recovery of Chinese equity markets in 2024 was driven by stimulus. In 2025, markets will be looking for the right type of stimulus, like that boosting household consumption, and the recovery in economic data. A less aggressive tone from President Trump will also enable a more sustainable rebound. There’s a fair, but not high, probability that all of these may happen.

The Chinese equity market offers cheap valuations, making it an attractive diversifier against the U.S. market. As AI development progresses in China, investors may revive interest in Chinese tech companies that were previously battered by regulatory concerns. Although any potential upside should be balanced against the unpredictable regulatory and political risks.

As for Chinese government bonds, yields have slumped to record lows due to deflation risks and economic concerns. If the economy improves, yields should edge up in 2025. The Chinese authorities are also wary of potential volatility in the financial system, warning institutions not to over-invest in Chinese government bonds.

China may also allow for a more competitive exchange rate, but it will proceed with caution in managing the yuan’s depreciation, given the macroeconomic and trade risks.

How does China’s economy impact the UK?

As we’ve seen, China faces its challenges, and given the size of its economy, this could impact global markets, including the UK. Or perhaps not?

As China shifts towards self-sufficiency and less commodity-intensive growth, its direct impact on the world will wane in comparison to the last few decades.

Interestingly, despite negative sentiment on China, developed markets’ equity indices have performed well, with a few exceptions.

A return to confidence in China could boost global markets, particularly European equities. For example, Chinese activity drives some of the largest stocks in the EURO STOXX 50 index, such as consumer discretionary and industrial stocks.

For the UK, China’s data typically influences mining stocks, given China is the world’s largest industrial commodity importer. This relationship will likely hold, if not weaken slightly, as the driver of Chinese growth shifts more towards consumption from investment.

Selected UK banks, like HSBC, are also exposed to China. A large share of HSBC’s profits is derived from Chinese markets, and its exposure to the Chinese real estate sector is a source of concern for investors.²

However, the UK is limited in its direct economic exposure to China, with only 5% of UK exports going to the country. For context, the UK actually exports more to Ireland than to China. This probably explains why the UK chancellor is keen to strengthen dialogue with Chinese officials and explore more bilateral trade opportunities.

Despite the UK’s limited direct exports to China, the country’s supply chains are highly interconnected with those of China. As a result, any shocks in China’s economy are likely to have an impact on UK manufacturers, particularly those in the automotive industry.

From lurking to striking in the AI race

Despite economic and domestic headwinds, the Chinese have a proven track record of innovation and adaptation. Today, it regularly boasts the highest number of STEM (Science, Technology, Engineering and Mathematics) PhD graduates each year.³ Together with bold stimulus action, it will be this innovation that helps steer China through its challenges.

China’s tech capabilities saw a ground-breaking AI development, DeepSeek, introduced at the turn of the Chinese New Year. The Chinese AI start-up has developed a robust open-source AI model at a fraction of the cost used to train its Western equivalent, ChatGPT. Its model also requires significantly less computing power to operate, making it a more efficient and cost-effective solution.

While the economics of DeepSeek have yet to be verified, the innovative technique to improve efficiency in training and inference has been applauded by top technology companies, including ChatGPT-maker OpenAI. DeepSeek’s unveiling has been a revelation in the global AI race, which begs the question, how did it happen?

Ultimately, China’s deprivation of high-end graphics processing units (GPUs) due to U.S. export controls forced Chinese AI developers to work with limited resources and constraints. This led to accelerated innovation and cost efficiency.

A year of several skins?

In the Year of the Snake, we can anticipate further reports on technological breakthroughs and transformations emerging from China’s robust ecosystem. This includes its strong STEM pool, vast data resources, extensive industrial facilities, and a culture characterised by determination, adaptability, and a rich history of innovation. Investors will undoubtedly keep a close watch on these attributes and developments.

Overall, the Year of the Snake is poised to be a time of renewal and agility for China, with potential for positive effects to ripple out to the global community.

1. People’s Bank of China, 2024 ↩︎
2. Statista, 2024 ↩︎
3. Center for Security and Emerging Technology ↩︎

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