The election of Donald Trump to the US presidency and sizeable stimulus programmes in China in recent months – including a CNY 10trn (USD 1.4trn) package announced in November – have given investors in China a lot to think about. However, Robert Gilhooly, senior emerging markets economist at Abrdn [LON:ABDN], estimates that the dynamics of US-China trade tensions will remain highly uncertain until at least mid-2025 or likely 2026.

In the meantime, he noted that Trump’s easiest and most likely moves on China would lift the average bilateral tariff rate from around 16% to 35% or 40%. This would have an outsized impact on China’s export-oriented businesses, especially where products do not benefit from a lack of substitutes.

“At the moment, it’s a balancing act. On one hand, we have these heightened geopolitical risks. On the other, Chinese policymakers did pivot fairly aggressively,” Gilhooly said.

“We do think more stimulus is going to come through as the trade war unfolds. We were positive on EM [emerging markets] and Chinese equities after the pivot in policy. I suspect with Trump’s win, we’ll probably be moving down to neutral on the Chinese side.”

The comments follow a distinct hardening of the geopolitical tone in the weeks since Trump’s election, which has implications for China-focused investors even if they deliberately avoid areas subject to tariffs. Where protectionist rhetoric was once confined to sensitive technologies, there is now a broader, sector-agnostic antagonism.

A dramatic example came last week when Texas Governor Greg Abbott prohibited “Texas investing entities” from making new investments in China and directed them to pull out as soon as possible.

“As Chinese aggression against the United States and its allies seems likely to continue, the financial risk associated with holding investments in China will also rise. Therefore, all investments of state funds in China must be evaluated and immediately addressed,” Abbott said in a letter to Texas state agencies.

The state’s largest pension fund, the USD 200bn Teacher Retirement System of Texas (TRS), has been investing in Asian private equity since the early 2000s but, like many global investors, has gradually pulled back its China exposure in the past two years. TRS could not immediately be reached for comment.

It is unclear to what extent Abbott’s directive will be enforceable or imitated by other political leaders. The development is perhaps most informative in terms of taking the overall political temperature and gauging the potential severity of new China tariffs in the coming year.

If tariffs put more downward pressure on company valuations in China, it could encourage distress-focused investors.

In this camp, even the idea of China as a permanently slower-growth economy with persistent developing-market risk variables is not necessarily a deterrent simply because downside protections in deal structures are a higher priority than growth outlook. One global distress investor with a presence in China noted that it has recently shied away from pure equity investments in-country, opting for preferred equity, senior secured loans, or mezzanine loans.

The firm – which has historically counted TRS as an LP – has slowed its China activity in recent years in favour of developed Asia, but the firm’s Asia head noted that a ramp-up is possible. Electric vehicles, batteries, and renewable energy are considered prospective.

“If we can protect our minimum return, we think China still represents a good investment opportunity pool at this stage, especially given the policy changes and all the inflection points in the market. If you look at the recent stimulus packages, it could be opportune timing,” the Asia lead said the day after the US election.

There remains a sense, however, that in the near term, China will continue to be pursued by global investors as a relatively niche, contrarian strategy rather than the largest and most obvious target in the region. As a signal of geopolitical volatility, higher tariffs will exacerbate this effect, domestic stimulus efforts notwithstanding.

“It feels like there’s a higher bar. It doesn’t mean [private foreign investment] couldn’t go in. I’m sure there will still be some investment opportunities that are deemed viable and relatively immune from a further escalation of the trade war, but the field is probably going to be narrower and you’re going to have to expect some very high returns to compensate for the additional risk,” Gilhooly said.

“Even with China having had a big step up in the stock market since September, a lot of the assets still look very cheap. The risk is that this is a value trap and they just remain cheap forever because of the geopolitical risks that are associated with them. The risks of a value trap have risen.”