Not seen for 60 years

As the Chinese emerge from their week of celebrating their New Year, this year is not only that of the horse, but a rarer version of the horse, the fire horse. The traits that the Chinese attribute to the horse are power, loyalty, stamina, independence and prosperity, and the significance of fire is that it is purported to amplify all of the aforementioned attributes. The markets normally pay little attention to superstition, but is there any evidence of them becoming more likely to be fulfilled in 2026?

On first glance, the Chinese consumer shows little sign of a revival, with consumer confidence only marginally better than last year, and remains close to the record lows, a situation that has persisted for almost four years.

Despite the government’s ambition to transform to a consumption led economy, the moribund housing market shows little of returning to growth, both on the commercial and residential sides of the market, and this has led to a corresponding deterioration in the net worth of housing. Therefore, until the housing market improves, the government will find it difficult to improve consumer confidence and encourage the Chinese consumer to spend some of their excess savings.

But before we write the consumer off, it is worth noticing in many of the company commentaries during the recent quarter, there are mentions that Chinese consumption is improving or at least not deteriorating further. To select a few from companies that we hold in the VT Tyndall Global Select Fund:

“We feel that first of all, and that's the most important thing for us, China is back to positive territory and also back to a positive luxury consumption, because there was a moment when consumers were buying more mass products.” Nicolas Hieronimus, CEO of L’Oréal.

“It was a terrific quarter. Our installed base reached an all-time high in both Greater China and Mainland China. And we set an all-time record for the upgraders, and we saw strong double-digit growth on switchers.” Tim Cook, CEO of Apple.

“So, let me start by saying that we are very happy to see the strong performance in China in '25, and it definitely gives us confidence in the outlook of 2026.” Iskra Reic, EVP of international, of AstraZeneca.

Since the first Trump administration, the trade relationship between the US and China has been under pressure with tit-for-tat measures being imposed on one another. Trade between each of them has deteriorated to such an extent that exports from China to the US has decreased from 20% in 2018 to 10% today and at the end of 2025 China dropped below Taiwan to being number four in the list of the US largest trading partners, accounting for 6.4% of total trade, according to the US Census Bureau.

However, China has not been sitting quietly on its hands as sanctions from the US hit home and instead has been successful in finding new homes for its products. Exports to Hong Kong, Vietnam and India increased by 31.2%, 20.5% and 22.1% respectively, with the export trade in integrated circuits, cars and office machine parts increasing at the fastest rates. Unlike the US, which used its trade deficit to justify the list of sanctions on ‘liberation day’, by December 2025, China had a positive trade balance of $1.2 trillion, and international exports increased 6.6%, compared to the level recorded in 2024. This year, President XI has welcomed Prime Minister Carney of Canada, Prime Minister Starmer of the UK and Lee Jae Myung, the President of South Korea, with trade deals being signed during each visit, and the visitor calendar looks fully packed with Global leaders for the coming months as well.

It is not only new market trade that is improving, but also in recent meetings and telephone calls between President Trump and Xi, the rhetoric appears to be more accommodative.

Agreements on soybean purchases, a crackdown on illegal fentanyl and a pause on rare earth export controls have been announced already in 2026 and President Trump is scheduled to visit China in April with President Xi planning a reciprocal visit towards the end of the year, indicating that perhaps the winter is thawing.

A large part of the trade restrictions on exports to China have focussed on parts and machines required to build semiconductor chips and other items required to advance AI technology, however, this plan appears to have backfired. The ability of China to divert funds and intellectual firepower into areas that it deems important is exemplified by AI, where the US has led it to develop homegrown solutions, as seen by DeepSeek’s announcement last year, and now they are at the leading edge despite the US controls.

In the words of Jensen Huang, “China is nanoseconds behind the US in the AI race. They have a large population of highly qualified students. Number one. Number two, 50% of the world's AI researchers are Chinese. Third, 70% of last year's AI patents are published by China. The ecosystem of AI in China is vibrant, rich, incredibly innovative. They work incredibly hard. This is a country with an enormous might."

China has proven that it is adaptable in the face of pressures, however, the property market has resisted multiple attempts to alleviate the problem. Should we see a full-fledged plan to revive the sector, consumer confidence will likely follow. Even without this stimulus there are signs that the Chinese consumer is starting to buy goods again, and the build-up in savings, which now earn next to nothing, suggest that this could increase further during the course of the year. Perhaps China can saddle up and get back to the races, and if the construction market recovers this will be incrementally positive for both Chinese and international companies alike.