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After a tough year for China’s markets, the Asian giant is trying to reform its way to success in 2025 as Donald Trump readies to enter the White House.
Showing the size of the challenge, new bank loans in China declined 17% last year for the first time since 2011 to Rmb18.1 trillion ($2.47 trillion) according to the People’s Bank of China (PBOC); and, according to data from the London Stock Exchange Group (LSEG) investment banking fees in China declined 18% to around $12.5 billion, compared to 2023 – the lowest year since 2019, as M&A and equity markets took a hit.
In its China Market Outlook 2025, economists at BNP Paribas attributed much of the malaise to China’s property sector, describing it as “the biggest weight on the economy since 2022” with a further 10% decline in property investment likely this year. Inflation is also likely to remain soft this year, with the Renminbi set to remain under pressure.
Speaking at the annual Asian Financial Forum (AFF) in Hong Kong on January 13, Pan Gongsheng, the governor of PBOC, said: “We will implement more proactive fiscal policies, raise fiscal deficit ratio, expand fiscal expenditure, and adjust and improve the structure and distribution of fiscal expenditure. We will also implement an appropriately accommodative monetary policy, adopt a mix of monetary policy instruments including interest rates and required reserve ratio to bolster adequate liquidity and a favorable social financing environment.”
Pan added: “The priority of macroeconomic policies should shift from promoting more investment in the past to promoting both consumption and investment, with more importance attached to consumption. By increasing residents’ income, enhancing consumption subsidy support, innovating consumption supply, and improving social security, we will effectively expand consumption, give better play to the role of consumption in driving up economic growth, and promote high-quality development of the Chinese economy.”
In a continuation of a scheme in 2024, China has already announced this year subsidies for some consumer goods with a trade-in scheme when purchasing digital products, with BNP Paribas expecting total support to double from 2024 to Rmb300 billion ($41 billion) in 2025.
Last year China subsidised 5.2 million auto trade-ins, 49 million home appliance units, and 51 million units of home decoration products, kitchen and toilet appliances.
The subsidies will be particularly welcome as Donald Trump sharpens his tariff pencils ahead of his inauguration on January 20, with China firmly in his sights. In part because of an effort to beat the tariffs, China had record exports last year, rising 10.7% year-on-year; its nearly $1 trillion surplus is likely to be in Trump’s sights after he pledged to raise tariffs on several key economies during the US election campaign. In 2024 Joe Biden and the EU already slapped tariffs on key Chinese exports, such as electric vehicles, which could impact exports this year.
The Biden adminstration is also ramping up pressure on labour practices relating in the Xinjiang region, adding a further 37 companies to an import ban list on January 14, while last week the Department of Defense shocked markets by adding electric battery maker CATL and tech giant Tencent to a list of firms that are alleged to be working with China's military.
Hong Kong’s role
PBOC’s governor also talked about how Hong Kong is going to play a key role in the Chinese economy moving forward, including as an offshore Renminbi hub, with the bank readying to launch Rmb60 billion of bills this week via the Hong Kong Monetary Authority's (HKMA's) Central Moneymarkets Unit.
Pan said: “In terms of enhancing the development of the offshore Rmb market, firstly, we will support the HKMA in launching Rmb trade financing liquidity arrangements.”
Pan added: “On the basis of the existing framework of Rmb liquidity arrangements, the swap line will be used to launch new Rmb trade financing liquidity arrangements, with terms of one month, three months and six months, with a total quota of Rmb100 billion ($13.6 billion), aiming to provide a stable and cost-effective source of funding for Rmb trade financing of commercial banks in Hong Kong.”
Full details of the scheme have yet to revealed, but banks should be able to exchange Hong Kong dollars with Rmb funding with the HKMA at interest rates linked to onshore rates, according to Eddie Yue, chief executive of the HKMA, speaking to Reuters.
And as of January 13, the Securities and Futures Commission (SFC), the HKMA, the PBOC, are allowing China government bonds (CGB) and policy bank bonds held by international investors through Bond Connect as margin collateral for all OTC derivative transactions cleared by OTC Clear, the Hong Stock Exchange’s (HKEX’s) clearing subsidiary.
OTC Clear has begun accepting these instruments as margin collateral for Northbound Swap Connect, and said it will accept them as margin collateral for other derivative transactions by the end of the first quarter of 2025.
Linklaters advised HKEX on the design, drafting of documentation for, and the regulatory and legal issues on taking CGBs as collateral. The law firm’s Asia head of structured finance and derivatives Chin-Chong Liew told FinanceAsia: “The latest enhancement is expected to add more synergies between the Bond Connect and Swap Connect programmes, and help to further support international investors’ participation in China’s onshore bond market. This transformative use of CGBs as offshore collateral is undoubtedly a defining chapter in the development and internationalisation of CGBs, with wider ramifications beyond the Connect programmes.”
He added: “Using CGBs as collateral for Swap Connect is expected to achieve cost savings on initial margin and offers the opportunity for Bond Connect investors to leverage and utilise CGBs which were until now locked up. Significantly, this development also paves the way for the taking of CGBs as collateral outside the Connect programmes – only earlier this week, HKMA and HKEX announced that CGBs could be used as collateral margin for all transactions type at OTC Clearing Hong Kong. This development could expand further and has the potential to revolutionise treasury management and collateral liquidity of CGBs in the global markets internationally."
Pledging his support to Hong Kong, Gongsheng added in his AFF address: “Hong Kong is a major international financial centre, boasting a highly open business environment, a developed financial market system, sophisticated financial infrastructure, enormous human resources advantages, a sound legal system, and an internationalised financial regulation system. In November, vice premier He Lifeng explicitly pointed out in Hong Kong that effectively building, strengthening, and developing Hong Kong as an international financial centre is not only what Hong Kong needs, but also what matters to our country.”
Also speaking at the AFF on January 13 was Bonnie Chan, HKEXs chief executive, who said that Chinese firms were bolstering the Hang Seng Index through a series of initial public offerings and secondary listings. Such listings, including China’s domestical appliance giant Midea, which raised $4 billion, should help international investors gain access to the Chinese market more easily, and helped spur several record breaking trading days, with one day seeing HK$620 billion ($80 billion) traded compared with an average of HK$100 billion earlier in 2024.
Inbound flows from Chinese investors, including retail ones, also helped spur the exchange to help diversify assets. BNP Paribas' economists also cited improved dividend payments from Chinese companies as one reason for this, meaning that inflows may become more time specific, e.g. around the year-end, including on Chinese exchanges.
The Hang Seng China Enterprises Index (HSCEI), which reflects mainland Chinese securities listed in Hogn Kong, was up 24% last year with HSBC seeing a further upside of 21% in 2025.
Investment banks’ poor year
According to the LSEG’s Deals Intelligence China Investment Banking Review 2024, there was an estimated $12.5 billion worth of investment banking fees generated in China in 2024, an 18% decline compared to 2023.
Underwriting fees from equity capital markets (ECM) accounted for 12% of China’s investment banking fee pool and totaled $1.5 billion, down 64% from 2023. Debt capital markets (DCM) underwriting fees grew 5% from the previous year and reached $9.9 billion. Completed M&A advisory fees amounted to $499.3 million, down 35% compared to 2023, while syndicated lending fees reached $636.8 million, down 25% from last year.
CITIC leads the China investment banking fee league tables with $1 billion in related fees with an 8.4% wallet share in 2024.
The overall China-involvement announced M&A activity fell to more than a decade low of $295.billion in 2024, a 4.8% decline in value compared to 2023. The number of announced deals dropped 15.5% year-on-year, marking the slowest annual period since 2013. This was in contrast to other more buoyant Asian markets such as Japan and India.
Target China M&A reached $255.5 billion, down 5.9% compared to the previous year. Domestic M&A activity increased by 2.9% year-on-year, reaching $232.2 billion, while inbound M&A activity totaled $23.3 billion, down 49.3% from a year ago, the lowest annual total since 2009. Outbound M&A totaled $23.1 billion, a 12.8% decline from 2023.
By sector, industrials captured 21.8% of the market share in deals, amounting to $64.4 billion, a 4% decrease from 2023. Financials accounted for 16.1% of the market share with $47.6 billion, a 24% increase from a year ago. High technology ranked third with 14% market share, worth $41.6 billion, down 2.5% from the previous year.
China International Capital Corp (CICC) led the M&A league tables, with $33.2 billion in related deal value, capturing an 11.3% market share.
China’s ECM raised $59.5 billion in 2024, a 54.3% decline in proceeds compared to 2023 and the lowest annual total since 2012; the number of ECM offerings fell 49.8% year-on-year. Traditional IPOs by Chinese issuers dropped to a two-decade low, raising $14.4 billion, a 71.3% decline from the previous year, with number of IPOs decreasing by 53.6% year-on-year.
Follow-on offerings from China-domiciled companies fell from 2023, amounting to $23.5 billion. Convertible offerings totaled $21.7 billion, up 5.4% from the previous year, despite a 64.7% decline in the number of convertibles.
Chinese issuers from industrials accounted for 24.5% of the ECM proceeds and raised $14.6 billion, down 54.1% compared to last year. High technology declined 55.3% from a year ago, totaling $14.3 billion with 24% market share. Materials rounded out the top three with 11.8% market share, as ECM proceeds fell 67.2% year-on-year. Sectors across the board saw yearly declines, except for retail, which grew 198.7% year-on-year to $4 billion.
CITIC led the China ECM underwriting with $7.3 billion in related proceeds, capturing 12.2% market share in 2024.
In more positive news, primary bond offerings from China-domiciled issuers raised a record $3.6 trillion in 2024, an 11% increase year-on-year, as the number of bond issues grew 13.9%; this is the highest period since records began in 1980, according to LSEG. This momentum is likely to continue into 2025.
Government and agencies accounted for 49.4% of the bonds, totaling $1.8 trillion in proceeds, up 4.8% from the previous year. Chinese companies in the financial sector had 30.2% of the market share, raising $1.1 trillion, a 13.9% growth in proceeds compared to the previous year. Industrials accounted for 9.3% of the market share, which amounted to $338.6 billion, a 21.9% increase from 2023. Apart from real estate, all other sectors witnessed an increase in proceeds compared to 2023.
CITIC took the lead in the China-domiciled bonds underwriting league table with $277.4 billion in related proceeds, capturing 7.7% market share, according to LSEG data.
Technology and tourism
Despite the woes, China is one of the world’s leaders in technology with artificial intelligence (AI), electric vehicles, smart computers, the new green economy and digitalisation all set to continue to grow over the next five years.
In addition, in a bid to boost tourism and foreign investment, China has been ramping up 30-day visa-free schemes for foreigners seeking to work or travel in the country.
As China enters the Year of the Snake with an early Chinese New Year at the end of January, the path ahead is going to be challenging, especially given Trump's unpredictability, however the Chinese government and central bank are well prepared.
