Interview, Statement
Is China’s rebound for real?
- Full-year real GDP growth for the current year is expected to be approximately 5.2%, with a 5% real GDP growth forecast considered comfortable and balanced in risk, despite uncertainty regarding the specific composition of growth.
- More than 200 billion RMB has been deployed by the national team to support the A-share market, while the State Council has announced the "Nine Measures" to guide long-term capital market development.
- Corporate profit growth for Chinese equities is forecast to range between 8% and 9% for the current year, with early improvement signs visible in the internet and consumer sectors, though the market remains in an earnings downgraded cycle.
- Equity valuations are currently at roughly one standard deviation below mid-cycle averages, with offshore equities trading at 10 times forward earnings and A-shares at 12 times forward earnings.
- The team anticipates a potential 10% upside for A-shares based on CSI 300 targets, with broader valuation gains ranging from 20% to 40% depending on whether China achieves regional averages or matches global leaders in shareholder returns and governance.
- Future market sustainability depends heavily on policy implementation, specifically the delivery of expected easing measures for the housing and equity markets, with the July policy plenum serving as a key visibility point for reforms.
- Specific regulatory policies aimed at improving shareholder returns, increasing dividend payouts, and encouraging buybacks are understood to be underway based on regulator conversations.
- The housing sector faces significant headwinds, with sales for the top 100 developers down 50% year-on-year in the first quarter, prompting a shift in government mindset toward addressing excess supply and providing central funding where local governments are financially constrained.
- Trade tensions remain a risk; while tariffs on 18 billion USD of products are not expected to cause immediate growth impacts (with some measures delayed until 2025 or 2026), a potential 60% tariff increase under a Trump administration could cumulatively subtract two percentage points from GDP.
- Hedge funds and mutual funds maintain allocation to Chinese equities at the low end of the five-year range, and the team views the A-share market as having a more compelling tactical setup due to its sensitivity to policy easing and anchored capital.
- A potential re-rating recovery is contingent on the authorities presenting a comprehensive plan to address structural overhangs; conversely, a disappointing policy outcome or continued trade pushback could prevent the extension of the current rally.
- While short-term export impacts are expected to be limited as it is difficult to stop Chinese exports, long-term trade imbalances may lead to further tariff pressure from international partners.