Looking back at 2024, Chinese equities delivered strong returns, outperforming most stock markets outside of the United States. However, it certainly didn’t feel that way last year, as Chinese shares were among the most volatile equity markets, exhibiting sharp ebbs and flows.
So far this year, China has been one of the best-performing equity markets and the question on everyone’s mind is whether this time it’s different. I’m inclined to say yes.
Last year began with a deep correction followed by a strong rally after policymakers stepped in, but that only lasted a few months and had fully reversed by mid-year. Another very strong rally ensued in September, but that also lost some steam soon after. The common denominator behind many of these short-lived rallies in recent years has been that they were mainly driven by hope.
After the mini fiscal stimulus in the fourth quarter of 2024, however, we’ve seen better economic data. And while the improvement has been gradual and uneven, China’s monetary and fiscal policy stance has firmly shifted.
It was encouraging to see consumption behavior responding to the subsidies, which sent a signal to both policymakers and market participants, that there is a strong link between fiscal stimulus and the Chinese consumers.
Clearly, more needs to happen to make it sustainable (and China has said more will come), but it also answers the question many had on whether fiscal policies would work at all given the subdued Chinese consumer confidence levels.
Another thing to consider is the property market, which has been responding better to the incremental measures — and we have even witnessed some green shoots in the past few months. This could well mean that the worst of the property deleveraging cycle is behind us, and potential tail risks have been preemptively dealt with.
And while markets have been monitoring the potential of a trade war, any tariffs announced so far have not been alarmingly high nor particularly disruptive. If anything, it appears that tariffs outside of China are where more of the action will be in Trump 2.0.
China’s January credit data also point to a solid start to 2025, comfortably surpassing consensus expectations and firmly pointing to growing policy support, while the emergence of Chinese artificial intelligence and DeepSeek challenges the view that China is vastly behind the United States on the tech front.
This has been a strong reminder to investors that China can and does innovate. It has certainly helped with market confidence, and sentiment around China’s investment attractiveness is clearly shifting.
We believe that Chinese AI can help drive earnings, productivity and even help on the employment front. The recent meeting between Chinese officials and private tech companies shows that the government is embracing “new quality productive forces”, and many would consider this development a catalyst for a new China tech chapter.
We believe that these all make up important differences when thinking about the current rally, with China AI perhaps the most important one as it reflects improving fundamentals and helps form a new narrative. Essentially, hope is taking a back seat while fundamentals are in the driver’s seat.
However, it is important that one should not discount hope. Should China also deliver additional fiscal headroom, we believe that this conviction will only grow stronger. Higher government spending driven by fiscal deficit expansion and rebounding credit impulse would only help add to the ongoing China equity market re-rating.
In a world where trade protectionism is on the rise, China needs to stimulate its domestic demand and fire up the dual circulation — in which domestic and international circulation coexist, with domestic circulation playing the primary role — rather than just relying on exports.
Doing so would not only help soften tariff headwinds, but more importantly help rebalance the economy and address the pressure of subdued inflation to create more sustainable growth. Also, stronger Chinese consumer appetites offer an alternative to US consumer overreliance at a time of shifting dynamics for global trade.
The strength and exceptionalism of the US economy are largely driven by its tech superiority and the strength of US consumers, which make up almost a third of global consumption. The entrance of DeepSeek in the AI space has shaken up global assumptions and highlighted that China is able to compete at the highest levels in technology.
Should China deliver consumption-boosting fiscal and monetary policies, it could potentially bridge the consumption gap and appeal to a world that could be looking for new trading partners. Essentially, China holds the fiscal keys to rebalance its economy and create more sustainable growth domestically. – China Daily/ANN