Key Takeaways
- China’s new Five-Year Plan looks set to persist with existing themes. That means keeping growth within a ‘reasonable range’ and ensuring household income growth keeps pace.
 - Greater emphasis will be placed on consumption as a driver of growth and China will continue its drive towards technological self-sufficiency.
 - Trade tensions between the US and China have eased. Using rare earths as a strategic tool helped China bring the US back to the negotiating table.
 - The US has stepped back from its threat to impose 100% tariffs and eased some restrictions on Chinese shipping.
 - In return, China has pledged to buy US soybeans and will curb exports of materials used in the production of fentanyl.
 - Two further talks between Presidents Trump and Xi are scheduled for 2026. The tone appears more constructive for now but tensions between the world’s two big economic superpowers will likely rumble on.
 
We focus on China and two key events from the past few weeks that are likely to shape the outlook going forward. The first is the release of the new Five-Year Plan by China’s policy planners, which largely continues existing themes. The second is last week’s meeting between President Trump and President Xi, which laid out a framework for trade negotiations over the next 12 months or so.
The five-year plan aims to keep annual economic growth within a ‘reasonable range’, which we interpret as around 4–5%. A major focus is on significantly increasing household consumption as a share of GDP. This reflects a continued shift away from manufacturing –which has driven Chinese growth for the past two decades – towards a more consumption-led economy.
There is also an emphasis on ensuring household income growth keeps pace with GDP growth, again suggesting a target of around 4–5%. Additionally, the plan aims to further expand the middle-income population, a key theme across emerging markets. As this middle class grows, it is expected to consume more – and in China’s case, potentially save a bit less.
Another key theme is China’s push towards technological self-sufficiency, which remains especially important in the current era of ongoing chip wars. This ambition is coupled with efforts to strengthen the manufacturing backbone of the economy and a recognition that, while China is shifting towards a more consumption-driven model, manufacturing still plays a vital role.
China also continues to advance its anti-involution programme, a policy that has been in place for some time. This initiative aims to curb excessive and self-defeating competition, as well as overcapacity in key industries such as electric vehicles and solar power. The policy encourages consolidation and limits price wars, with the goal of stabilising profits, preventing deflation, and supporting sustainable growth. This direction is expected to persist for some time, with China continuing to foster national champions in strategic industries.
China appears to have played its hand well in the recent round of escalating trade rhetoric with the US. Rare earths have emerged as a strategic tool for China to exert influence, and they have been a key factor in bringing the US back to the negotiating table. China dominates both the resources and production of rare earth elements, and it seems to have leveraged that position effectively.
At one point, China hinted at restricting rare earth exports, prompting the US to threaten 100% tariffs in response. This led to a period of escalation in recent weeks. Interestingly, markets remained largely unfazed, with a prevailing belief that talks would ultimately conclude positively.
China has now pledged to purchase US soybeans, which should help ease pressure on American farmers. It has also committed to curbing exports of materials used in the production of fentanyl – a highly addictive drug that is currently causing significant social issues in the US.
On the other side, the US has stepped back from its threats to impose 100% tariffs on Chinese goods and eased some of the restrictions and costs that were set to be imposed on Chinese shipping.
The successful meeting between Presidents Trump and Xi last week means we can likely move past concerns about 100% tariffs at least for the next 12 months. Two further meetings between the leaders are scheduled for 2026, which should help maintain a constructive tone in the interim.
But is the story over? Perhaps not. These are the world’s two largest economic superpowers, and it is unlikely they will always move in perfect harmony. This may simply be a pause, rather than a conclusion.
Importantly, China continues to take a long-term view. It has made significant progress in diversifying away from heavy reliance on exports to the US, which positions it more resiliently for future shifts in global trade dynamics. Chinese exports to the US have declined by 27% year-on-year, but overall Chinese exports are up 8%. Exports to the US now account for just 12% of China’s total trade – down from around 20% in 2018, when President Trump initiated the first round of trade wars.
We are now seeing a significantly higher US effective tariff rate on Chinese goods – around 47%, compared to 20% at the start of the year. Despite this, China appears to be coping well. It has diversified effectively in recent years, making strong use of the Belt and Road Initiative to open new markets and expand its global influence.
As China continues to evolve into a more consumption-driven economy, this transition should serve as a positive driver for long-term growth. Our outlook on emerging markets remains constructive, and we maintain a positive view on China. That said, we are mindful that markets have rallied strongly over the past 12 months, but we still see scope for further positive momentum.