China: technological progress to help overcome economic headwinds

While China’s economy is showing signs of improvement on the back of technological breakthroughs and a stabilised property sector, renewed trade tensions and weak domestic demand are seen weighing on that recovery.

Two separate panels of eminent economists and market experts at the HSBC Global Investment Summit shared their insights on the opportunities and challenges facing China’s economic and investment outlook.

The threat of tariffs

Tariffs are one of the largest economic headwinds facing China: “The case for tariffs, claimed by some of China’s trade partners, is that large amounts of Chinese investment leads to the overproduction goods that cannot be absorbed in China. These goods are exported all over the world, which is leading to the US and other countries to reacting by imposing trade barriers on Chinese products,” said Dr. Frederic Neumann, Chief Asia Economist and Co-Head Global Research Asia, HSBC.

But unlike during the first Trump administration, China is well prepared for tariffs this time around. The country has in the past few years focused on broadening its access to international markets.

Dr. Keyu Jin, Global Economist, Harvard University, said more trade agreements and investment pacts were expected to be signed in the years ahead, further building China’s resilience in external trade. Still, tariffs remain a threat to China's competitiveness, especially as its dominance in specific industries raises concerns among other global economies, she said.

While China has diversified its trade routes and investment partnerships over the years, its rising share of global exports could subject the country to more tariffs in future, not only by the US, but also other nations that want to address trade imbalances with China.

Boosting domestic consumption

“China's political economy model is brilliant at scaling up supply and quite weak at raising personal demand and consumption,” said Dr. Jin.

China has long struggled with weak domestic demand, which remains a primary challenge facing the country’s economy. The absence of adequate social insurance and low income levels among China’s rural and migrant workers are seen as factors undermining consumer confidence.

To address these challenges, there was agreement on the panel that China must implement fundamental structural reforms – such as tax reforms and efforts aimed at income redistribution.

Currently, China lacks the tools to redistribute income from the government to households and from richer households to their less well-off counterparts. China’s indirect tax systems, which are regressive, add to the challenge.

A more progressive tax structure would help increase disposable incomes and redistribute wealth while better social insurance programs would provide citizens with greater economic security, making them feel more comfortable to spend money.

Technology and demographics could also play a role in boosting consumption. Digital platforms and green consumption are gaining traction, while efforts to increase birthrates — through childcare support, consumer loans, and preschool programmes — are expected to drive consumption growth in the long term.

Technological boost to confidence

Amid these challenges, technological innovations and a stabilising macroeconomic environment have revived to investor confidence in China. The emergence of Chinese AI startup DeepSeek has captured global attention and triggered a rally in markets, which in turn caught many by surprise. Yet panellists highlighted how DeepSeek’s emergence was anticipated by Chinese investors who closely watched technological developments in China.

“We have been very confident about China’s technological advancement, even before DeepSeek, which has enhanced overseas investors’ understanding on this area,” said Yimei Li, Chief Executive Officer, China Asset Management Co. She added that China’s innovation capacity is expected to improve further, which will prompt global investors to increase their allocations to Chinese assets.

Still, the investment landscape is not without its challenges. Panellists stressed the importance of patient, long-term capital in fostering innovation. China’s markets, dominated by retail investors seeking quick returns, often lack the stability needed to support technological advances. Investor education and policy incentives are crucial for creating an environment conducive to long-term investments in innovation.

Real estate stability

Another key factor influencing China’s investment landscape is the stabilisation of its real estate market. After years of turbulence, the sector has recently shown signs of recovery, following government measures addressing local government debt and introducing debt reduction initiatives. These initiatives also contributed to broader economic improvements.

The real estate sector’s recovery has had a ripple effect on other areas of the economy, including consumption. With property prices stabilising and local governments regaining financial stability, consumer confidence has begun to recover. This positive momentum is expected to support further economic growth and investment.

Hong Kong continues to play a pivotal role in facilitating Chinese investment, acting as a bridge between mainland China and global markets. Through mechanisms like Stock Connect and Bond Connect, Hong Kong enables seamless asset allocation for investors both within and outside China.

The panel highlighted how these initiatives have, allowing mainland investors to diversify their investments and access international markets while providing overseas investors with a more convenient exposure to China’s onshore markets.

This super-connector role is particularly important as China seeks to balance its domestic economic challenges with its global ambitions. By leveraging Hong Kong’s financial infrastructure, China can attract more international capital and foster greater integration with global markets.