The US-China trade agreement has minimized tariff worries for 2026, letting policymakers concentrate on boosting domestic demand and innovation. China’s GDP growth target for the year is 4.5-5.0%, supported by macro policies. Economists at Standard Chartered have updated their growth forecast to 4.6%, thanks to improvements in productivity and steady exports. Inflation is expected to drop to 0.6%, down from 1.0%. China faces challenges like balancing capacity cuts while stabilizing investments and effectively allocating fiscal resources. While macro policies will support growth, they will avoid ‘ultra-loose’ measures to maintain financial stability. The official budget deficit is likely to narrow slightly to 3.8% of GDP in 2026, with significant bond issuance from central and local governments. A policy rate cut is now projected for Q2-2026, and a 25 basis point reserve requirement ratio (RRR) cut is anticipated in Q1.

China’s 15th Five-Year Plan

China’s 15th Five-Year Plan emphasizes increasing consumption and innovation, with new growth drivers taking the place of traditional ones. The emerging economy, especially sectors focused on consumption and technology, is expected to contribute more to GDP, potentially surpassing the property sector. The recent US-China trade agreement is major news, reducing uncertainties that have affected markets throughout 2025. This trade stability allows us to focus on China’s domestic policies, which are shifting towards promoting internal growth. With tariff risks diminishing, we can expect positive sentiment towards Chinese assets in the weeks ahead. With a reserve requirement ratio (RRR) cut expected in the first quarter of 2026, it’s wise to prepare for increased liquidity. The central bank’s dovish approach, coupled with low inflation anticipated at 0.6%, creates a favorable climate for equities. Data from November 2025 indicated that the official manufacturing PMI remains soft at 49.8, bolstering the case for imminent stimulus.

Markets and the Yuan

For equity derivatives, consider call options on major Chinese indices like the FTSE China A50 or CSI 300. The market has reacted positively, with the CSI 300 index rising over 8% in the past month since rumors of the trade deal started. This trend may continue into the new year, driven by the potential for easier monetary policy. The outlook for the yuan is now more complicated, so using currency options may be wise. While the trade deal offers some support, the expected RRR and policy rate cuts may limit the yuan’s strength against the dollar. Though the yuan has improved since its lows earlier this year, breaking above the 7.30 level could be challenging due to interest rate differences. Focus on sector-specific trades targeting the new growth drivers of consumption and technology. Steer clear of derivatives linked to the struggling property sector, which has seen property investment decrease nearly 10% year-over-year as of October 2025. Instead, consider options related to consumer discretionary and artificial intelligence stocks, aligning with the 15th Five-Year Plan’s policy direction. With a major risk event now behind us, implied volatility on Chinese assets has likely fallen, making options more affordable. This presents a cost-effective opportunity to position for a possible rally into early 2026. Selling volatility through strategies like covered calls on existing long positions could also be appealing if we enter a phase of steady growth rather than sharp gains. Create your live VT Markets account and start trading now.

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