Is China’s rebound for real?

Market Performance and Drivers

• Chinese offshore equities (HK-listed) rallied nearly 30% from their late January trough, marking the best global performance over the past three months.
• Domestic A-share indices gained over 15% during the same period.
• Rebound drivers identified by Goldman Sachs Research include:
  • Q1 real GDP growth of 5.2%, exceeding consensus expectations and prompting an upward revision in full-year growth forecasts.
  • Deployment of over 200 billion RMB by the "national team" to intervene in the A-share market, effectively establishing a downside put option.
  • Exercise of a "policy put option" via pro-growth messaging from the April Politburo meeting and equity market reform initiatives from the State Council.
• Investor sentiment has shifted as risks are "priced out," moving from pessimism regarding a property crash to a view that fundamentals are weak but stable.

Sustainability and Fundamentals

• Goldman Sachs projects a 10% upside for the CSI 300 index over the near term, contingent on the delivery of earnings and policy easing.
• Current earnings forecasts (8–9% EPS growth) remain below consensus (12–13%), relying on a moderate expansion in valuation multiples to achieve targets.
• Offshore equities trade at approximately 10 times forward earnings, and A-shares at 12 times, both roughly one standard deviation below mid-cycle averages.
• Investor positioning remains conservative, with hedge funds and mutual funds holding Chinese equity allocations at the low end of their five-year ranges.
• Key areas of earnings improvement include the internet and consumer sectors.

Policy Implementation and Housing

• The "Nine Measures" announced by the State Council aim to strengthen supervision, raise listed company quality, and enhance investor protection.
  • Goldman Sachs estimates potential valuation gains of 20% if China reaches regional averages on governance and shareholder returns, or 40% if it matches global leaders.
  • Implementation momentum is expected to accelerate in the coming months, with a focus on specific policies for shareholder returns and dividends.
• The housing market remains a critical variable:
  • Top 100 developers reported a 50% year-on-year decline in sales in Q1.
  • Policy thinking has shifted from a "market-driven solution" to direct government intervention to reduce excess supply and rebalance demand.
  • Current initiatives involve local governments or financing vehicles purchasing properties for trade-ins or social housing; the central government is viewed as necessary to fund these programs at scale.
• Investors are awaiting visibility on policy details, particularly ahead of the July Politburo meeting.

Geopolitical and Trade Risks

• The Biden administration announced new tariffs on $18 billion worth of Chinese goods (EVs, batteries, solar, semiconductors), with some effective dates extending to 2025–2026.
  • Goldman Sachs estimates this specific tariff package has a negligible immediate impact on China's GDP.
• A potential future scenario involves a 60% tariff increase on all Chinese exports to the US if Donald Trump wins the election, which could cumulatively subtract two percentage points from Chinese GDP.
• Chinese exporters remain resilient due to competitive advantages; US trade deficits and China's trade surpluses have continued to widen despite previous trade wars.
• Policymakers are expected to be calmer regarding trade tensions compared to 2018–2019, though long-term risks persist if trade imbalances accumulate.

Forward-Looking Economic Outlook

• The consensus on top-line GDP growth has stabilized around a 5% target, with uncertainty shifting toward the composition of growth (exports vs. consumption vs. infrastructure).
• Hui Shan notes a divergence between the housing downturn and consumption, suggesting the economy can grow without a booming property sector ("bad news is not that bad").
• Hui Shan forecasts 5% real GDP growth for 2024, viewing risks as currently balanced.
• Goldman Sachs maintains a constructive view on A-shares over the offshore market due to higher sensitivity to policy easing and more anchored, domestic liquidity.