China's expanding tech sector helping it weather tariffs storm

Despite lingering concerns over its property sector, recent data from China suggests the world’s second largest economy is weathering the tariffs storm, helped by a burgeoning tech sector. Last week’s GDP data showed China’s growth holding steady at 5.2% in the second quarter, helped by exports that have remained resilient in the face of US tariffs.

China’s equity markets continued their long march forward this week after the People’s Bank of China kept key lending rates at record lows for July. Hong Kong’s benchmark Hang Seng Index climbed on Tuesday to its highest level since November 2021, to close at 25,130. Year to date, this brings the index return to 29.3%. 

Meanwhile, a study by Australia’s Griffith University and the Green Finance & Development Center in Beijing showed Chinese construction contracts and investments in Belt and Road Initiatives totalled US $124 billion over 176 deals in the first six months of the year, greater than the total of $122 billion for the whole of 2024.

Sandy Pei, Senior Portfolio Manager at Federated Hermes, highlights earlier challenges for China, marked by the collapse of the real estate market and global supply chain shifts, but says the world’s second-largest economy is now increasingly establishing itself as a global technology leader. This includes leadership in consumer electronics, electric vehicles, renewable energies, drone technology, and shipbuilding. The country is also catching up in the semiconductor industry, particularly in the field of memory technology.

“In the field of artificial intelligence, China already has considerable software expertise, second only to the US who are advanced in AI chip design and software,” says Pei. “China also has extensive domestic manufacturing capabilities in this field, whereas the US outsources to Taiwanese and Korean suppliers.”

Taken together, this means China’s economic transformation is showing clear progress: the real estate sector, whose share of GDP has fallen from over 25% to the high teens at present according to Bloomberg, is losing importance. At the same time, high technology and advanced manufacturing industries are becoming increasingly relevant.

“We see particular opportunities in the valuation of Chinese equities, stabilising corporate earnings, and structurally improved returns on equity,” says Pei. “The low interest-rate environment could make equity returns attractive for local investors, especially if companies continue to increase their payout ratios and accelerate share buybacks.”

Japan’s tariff fillip

Japan this week announced that it had signed a trade deal with the US which would see tariffs and vehicle import levies cut from 25% to 15%.

Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes, highlights how trade and tariffs have been front and center of this year’s market moves, with Japan’s economy particularly hard hit. 

On the tariffs deal Grant notes that both sides will have walked away feeling they’ve left money on the table. “Japan will have wanted a blanket tariff at 10%, and maybe if they’d held out, they could have got it,” he says. “But it has avoided what would have been a devastating 25% tariff on autos and, any delays may have risked picking up pennies in front of a steam roller. There are parts of the deal that are mutually beneficial; Japan needs rice, which US farmers can provide.”

Grant believes the European Union are now likely to use Japan’s example to guide their own trade negotiations with the US. “They can still get a good deal but will need to make a sacrifice or two to allow Trump to proclaim a win,” he says. “There’s widespread optimism that such a deal can be struck, and equity markets are moving upwards as the trade war reaches what we’re hoping will be its final act.”