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Macroscope | 3 reasons investors are falling in love with Chinese stocks again
Much has to go right for Chinese stocks to continue to outperform, but there is great potential if investor sentiment continues to thaw
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Are the stars aligning for Chinese stocks? That this question is being asked by many investors attests to the dramatic shift in sentiment this year.
As recently as January 13, the MSCI China Index – which tracks Chinese companies listed at home and abroad – was 21 per cent below its level on October 5, when markets were dazzled by Chinese policymakers unveiling more forceful monetary and fiscal stimulus measures. Since then, the gauge has surged 25 per cent.
Few would have bet on a sharp rally given the many headwinds facing China’s economy. The crisis in the property sector is far from over, consumer confidence has remained depressed since the brutal lockdowns in March 2022 and the benchmark 10-year bond yield is signalling that deflationary pressures will persist.
On April 2, US President Donald Trump heaped further pressure on the economy by imposing a 34 per cent reciprocal tariff on Chinese goods. This was part of a torrent of new levies on America’s trading partners.
Yet even after the onslaught of protectionism began in early February, sentiment towards China had improved dramatically. In practically all the research reports on Chinese equities from the big investment banks, the tone and substance of the commentary has changed markedly since last year.
Bank of America views Chinese policymakers’ prioritisation of consumption as one of the “big secular inflection points of 2025”, along with the end of Japanese deflation and European fiscal stimulus. HSBC believes “the question has shifted from ‘how much worse will it get’ to ‘can the rally be sustained’?”, while Societe Generale says Chinese shares are “in the early stages of a bull market”, underpinned by the so-called Xi put, denoting a commitment from policymakers to support asset prices in the event of a shock.
Having experienced several false dawns in the past two years partly because investors’ expectations about the pace and scope of stimulus measures were too high, Chinese shares are benefiting from new domestic and external sources of support which provide a stronger underpinning for the market.
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