The US-China trade agreement has reduced tariff uncertainties for 2026, allowing policymakers to focus on domestic demand and innovation. China’s GDP growth target for 2026 is expected to be 4.5-5.0%, with macro policies supporting this goal. Economists at Standard Chartered have revised their 2026 growth forecast to 4.6%, due to total factor productivity gains and resilient exports. Inflation is projected to remain low, with a forecast decrease to 0.6% from a previous 1.0%.

There are challenges such as balancing capacity cuts with investment stabilisation and optimal fiscal resource allocation. China’s macro policies are expected to support growth, avoiding ‘ultra-loose’ measures to ensure financial stability. The official budget deficit might narrow slightly to 3.8% of GDP in 2026, with central and local bond issuance likely to remain significant. A forecasted policy rate cut timeline has moved forward to Q2-2026, with a 25bps reserve requirement ratio cut expected in Q1.

China’s 15th Five Year Plan

China’s 15th Five-Year Plan prioritises consumption and innovation, with new growth engines gradually replacing traditional ones. The new economy, especially consumption-oriented and tech-driven sectors, is anticipated to comprise a greater proportion of GDP in the future, possibly overtaking the property sector.

The recent US-China trade agreement is a significant development, removing a major source of uncertainty that has weighed on markets for much of 2025. This stability in trade relations allows us to focus more on China’s domestic policy, which is clearly shifting towards supporting internal growth. With tariff risks fading, we can anticipate a more positive sentiment towards Chinese assets in the coming weeks.

Given the expectation for a reserve requirement ratio (RRR) cut in the first quarter of 2026, we should position for increased liquidity. This dovish turn by the central bank, combined with very low inflation now forecast at 0.6%, creates a supportive environment for equities. Recent data from November 2025 showed the official manufacturing PMI was still soft at 49.8, reinforcing the case for this imminent stimulus.

Markets and the Yuan

For equity derivatives, this suggests looking at call options on major Chinese indices like the FTSE China A50 or CSI 300. The market has already reacted positively, with the CSI 300 index rallying over 8% in the past month since the trade deal rumours began circulating. This momentum could continue as we head into the new year, fuelled by the prospect of easier monetary policy.

The outlook for the yuan is now more complex, so currency option strategies may be prudent. While the trade deal provides a supportive floor, the expected RRR and policy rate cuts will cap the currency’s upside against the dollar. The yuan has strengthened from its lows earlier in the year, but we see it struggling to break much past the 7.30 level as interest rate differentials remain a headwind.

Sector-specific trades should focus on the new growth engines of consumption and technology. We should avoid derivatives linked to the property sector, which continues its prolonged correction with property investment still down nearly 10% year-over-year as of October 2025. Instead, options on baskets of consumer discretionary and artificial intelligence-related stocks are better aligned with the policy direction of the 15th Five-Year Plan.

With a major risk event now in the past, implied volatility on Chinese assets has likely decreased. This makes it cheaper to buy options, presenting a cost-effective way to position for a potential rally into early 2026. Selling volatility through strategies like covered calls on existing long positions could also be attractive if we enter a period of steady, grinding gains rather than sharp spikes.

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