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Korea Herald
04-08-2025
- Business
- Korea Herald
[Contribution] Is China equity recovery durable?
China's equity rally faces a wall of scepticism after years of false dawns. However, this time could be different: Beijing's crackdown on irrational competition in key industries and sustained stimulus, compounded by moderating US trade rhetoric ahead of a potential Trump-Xi meeting, are setting the stage for a sustainable equity market rebound most are missing. The Hang Seng index and MSCI China index have soared over 25 percent year to date. However, China equities still registered a net fund outflow this year. This illustrates that global investors have yet to gain high conviction in China equities. Such sentiment could mainly be attributable to policy uncertainty and lacklustre equity performance in recent years, among other reasons. We see reasons for optimism for a durable recovery in China equities. Early signs of economic improvement are emerging, including stronger-than-expected 6.4 percent year-on-year retail sales in May. Sceptics may view this as bad news, since this, when combined with the improving market performance, may signal no urgency for further policy stimulus to revitalize domestic demand. We argue otherwise. There are two trends on which authorities are placing increased emphasis: rising savings rates and persistent deflationary pressures. The Chinese are known for saving up for the "rainy day." However, the acceleration in the household savings rate from 44 percent in 2023 to 55 percent in 2024 has been startling, masking concerns about economic uncertainty. This uneasiness is understandable given the challenging global environment. While US-China tensions have eased of late, tariffs on Chinese imports have gone up. Meanwhile, excess manufacturing capacity, after front-loading of exports to beat US tariffs fades, could sustain deflation. For instance, producer price deflation worsened more than expected to minus 3.6 percent year-on-year in June. There is a risk China's retail sales growth could decelerate without incremental stimulus. Subsidized trade-in consumption programs launched last year, which contributed to strong retail sales in the first half, will likely lose steam in the coming months. Given consumption is a key engine of China's growth, we see an increased likelihood of additional policy measures to drive retail growth tactically and structurally. Policies will likely include ways to widen the scope of consumption subsidies and ease restrictions on household registration, or 'hukou.' Hukou relaxation could be strategically bundled with housing stimulus and social safety net reforms. On one end of the demographic spectrum, retirees could be incentivized to shift to lower-tiered cities or rural areas with lower costs of living and better living conditions. The lower-tiered cities suffering the largest housing supply gluts could turn the unoccupied housing projects into social housing developments for older adults. Affordable housing projects could also be developed in the outskirts of top-tiered cities, with the aim to attract younger, educated migrants, who, encouraged by better career prospects, could establish families sooner. Structurally, China is seeking to spur childbirth by recently announcing the first nationwide cash handout program for every child under the age of three. Furthermore, the nation will likely accelerate the upgrade of elderly care goods and health care services to stimulate consumption of the 'silver hair' segment, including the development of humanoid robots for elderly care. Recent official meetings since July have further reinforced our optimism about China's policy outlook. On 1 July, the Central Commission for Finance and Economic Affairs called for the need to curb irrational price competition, accelerate the eradication of obsolete capacity and promote local government standards to support businesses. Following the meeting, the State Council pledged on 16 July to regulate the irrational price competition in the EV industry. The State Administration for Market Regulation also met with major online food delivery platforms to stem unfair competition. We believe these measures align with China's shift in growth focus from quantity to quality. These measures will help mitigate deflation, boding well for China equities. There is no coincidence that the policy-sensitive onshore A shares index, which has underperformed Hong Kong's Hang Seng index YTD, has been catching up with the latter in July. Backed by improving fundamentals, China's equities are at the cusp of a turnaround, with earnings expectations bottoming and valuations ticking up. China equity valuations, partly constrained by low investor positioning, still trail their historical and peer averages, with a price-to-earnings multiple of 12-13x notably below the US level of above 22x. China's earnings prospects are also brightening as pricing and profit margin trends stabilize with policymakers focusing on rationalizing competition and capacity. Rising prospect of a Trump-Xi meeting this year, the dollar's ongoing weakness and a peak in trade tensions are broadly supportive of our positive view on global equities. Within our globally diversified allocation, we are overweight Asia ex-Japan equities. Within Asia, excluding Japan, we believe China equities will generate excess returns (alpha) thanks to Beijing's concerted and targeted policy measures to sustain growth, reduce capacity and overcome deflation. That said, we reiterate the importance of diversifying across asset classes, including quality bonds, gold and alternative investments, to produce optimal returns and protect your wealth against market volatility.
Mint
31-07-2025
- Business
- Mint
Tariffs are just tip of the iceberg for China. These are the bigger problems.
As the U.S. and China extend their tariff truce, and appear to be in a de-escalatory lull for now, there's another risk brewing in China for investors to focus on: Beijing's efforts to curtail deflationary forces spreading through the world's second-largest economy. Chinese stocks have been a standout this year, with the MSCI China up 26%, trouncing the 9% gain in the S&P 500. Those returns were sparked in part by the excitement over DeepSeek's artificial-intelligence models that put a spotlight on the innovation bubbling up in China. But beneath the excitement about the technology sector is a persistent economic rout. Economists think China's growth is under the 5% target Beijing has set for this year and headed lower. The property market is four years into a slump. Gradual efforts to stabilize the economy have done little to lift consumer spending in a sustained way. Businesses are still hesitant to spend, even more so as deflation has gripped the economy. Investors have been waiting for officials to change their tack on stimulus efforts, but those moves have been incremental, creating spurts of growth that quickly lose momentum. Beijing has leaned on stimulus only when necessary—and lately things aren't that bad. That was reinforced in this week's Politburo meeting, where officials left the door open for incremental and targeted measures but led economists to think measures may be smaller than some expected. The U.S. and China dialed back trade-related tensions in recent weeks, and analysts expect a detente to pave the way for an in-person meeting President Donald Trump wants with China's Xi Jinping this fall. That has taken further pressure off China to act. Indeed, on a recent trip to China, Michael Hirson, head of China research for 22V Research, found confidence in China's ability to navigate the trade situation. That confidence is twofold: China's demonstration that it indeed has leverage with its control of rare earths such as critical magnets used by U.S. auto makers, industrials, and for defense purposes; and Chinese exporters' ability to mitigate the tariff impact by shifting production and selling to other markets. Also helping exporters: the Chinese yuan's weakness against the euro and other nondollar currencies. There are still risks, including the U.S. penalizing China for its purchase of Russian oil, as it just did with India. Policymakers are turning their attention to deflation, a byproduct of years of aggressive manufacturing investment that has fueled the one bright spot in the economy—exports—but created intense competition and pricing pressures in industries such as electric vehicles, solar panels and e-commerce. TS Lombard's head of China research, Rory Green, expects Beijing to focus efforts to curb overcapacity on traditional heavy industry—steel, cement, and copper. While EVs and other areas of technology could see increased scrutiny on pricing, Green says those might be offset with some sort of policy support. Officials so far have leaned toward enforcing existing regulations to limit capacity rather than implementing a batch of new rules or mass closures of facilities. Green expects that to continue, and for Beijing to offset some of the impact with investments in infrastructure and spurts of other stimulus. But there is the risk that Beijing goes too far in curtailing manufacturing investment, resulting in a more pronounced economic slowdown. The improvement in U.S.-China relations may buffer the stock market for a while, as could the view that Beijing's efforts to cut capacity will help profits, Green says. But the economic problems will eventually catch up with the market—especially if Beijing stays on this course in its approach to stimulus. Write to Reshma Kapadia at
Business Recorder
29-07-2025
- Business
- Business Recorder
China stocks extend 5-week rally ahead of trade talks
HONG KONG: China stocks extended their five-week rally on Monday, with the rare earth sector climbing to a three-year high ahead of crucial trade talks with the United States, while insurers gained following an industry policy change that boosted sentiment. The Shanghai Composite index reversed earlier losses to close up 0.1% at 3,597.94, hovering near the highest level in 3-1/2 years. The blue-chip CSI300 index added 0.2%. The rare earth sector climbed 1.5% to a fresh three-year high, lifting onshore markets higher, as top US and Chinese economic officials prepare to resume talks in Stockholm later in the day. The discussions will likely extend their trade truce by three months, preventing the implementation of higher tariffs, according to analysts. The insurance sector added nearly 3% to rank among the best performers onshore, after the industry body cut the reference rate for life insurance products. 'Investor concerns on US-China trade frictions appear to have eased,' Kinger Lau, chief China equity strategist at Goldman Sachs, said in a note. 'A potential US-China trade deal could be a market-clearing event for Chinese stocks.' The bank raised its 12-month MSCI China index target to 90 from 85, representing an 11% potential rise, due to improved US-China relations, reduced regulatory risks, stronger yuan and supportive liquidity conditions. Weighing on the markets on Monday, commodity-related companies pared last week's rally which was spurred by Beijing's campaign to tackle overcapacity. Indexes tracking steel and coal sectors lost 1.4% and 2.9%, respectively. Hong Kong's benchmark Hang Seng Index rose 0.7% to 25,562.13 and continued to hover near the highest since November 2021.
Yahoo
10-07-2025
- Business
- Yahoo
BofA Lowers Yum China (YUMC) PT, Keeps Buy Rating
Yum China Holdings, Inc. (NYSE:YUMC) is one of the 11 Best Food Stocks to Buy According to Wall Street Analysts. On July 7, BofA Securities reduced its price target for Yum China Holdings, Inc. (NYSE:YUMC) from $60.50 to $56.50 but kept a 'Buy' rating. The firm pointed out that Yum China Holdings, Inc. (NYSE:YUMC) has underperformed the MSCI China index by 16% since Liberation Day. This weaker performance was mainly attributed to investors reassessing the company's long-term growth after Yum China Holdings, Inc. (NYSE:YUMC) shifted its focus to smaller stores and franchising. The iconic yellow and red roof of a franchise restaurant in the bustling streets of a city. BofA's channel checks showed that Yum China Holdings, Inc.'s (NYSE:YUMC) same-store sales growth (SSSG) was around 0-1% in the second quarter. There were also indications that the performance in June might surpass expectations. BofA also observed sequential delivery order growth of over 10% in the past weekend. The research note also mentioned that Meituan and Alibaba have started offering strong delivery subsidies. These discounts could help Yum China Holdings, Inc. (NYSE:YUMC) achieve same-store sales growth in the third quarter of 2025, which is usually a busy season for the company. The research firm expects same-store sales to improve in the second half of 2025. Yum China Holdings, Inc. (NYSE:YUMC) is the largest restaurant company in China, operating more than 16,000 restaurants under 6 brands across more than 2,300 cities. The company operates and franchises restaurants under brands like KFC, Pizza Hut, and Taco Bell. While we acknowledge the potential of YUMC as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock. READ NEXT: 10 Best American Semiconductor Stocks to Buy Now and 11 Best Fintech Stocks to Buy Right Now. Disclosure: None. This article is originally published at Insider Monkey. Sign in to access your portfolio
Yahoo
20-06-2025
- Business
- Yahoo
China was called 'uninvestable' not long ago. Why investors are changing their minds.
After investors fled in recent years, Wall Street is warming up to Chinese stocks again. Investors are encouraged as trade tensions ease and AI advances. Goldman Sachs identified 10 Chinese stocks it likes, including Tencent and Alibaba. Wall Street has shunned China's stock market for its volatility amid the country's economic issues. A trade war, tough regulations, and geopolitical tensions have made it difficult for investors to navigate, but as tensions ease and AI technology continues to advance, investors are starting to warm up to China again. "China has been a market that has been deemed almost uninvestable for the last year or two," Osman Ali, Goldman Sachs Asset Management's global cohead of quantitative investment strategies, said at the bank's mid-year investment outlook on Wednesday. "That's starting to change, both as a consequence of better growth, a consequence of reform, and also, hopefully some easing trade and tariff tensions." Investors' changing opinions on China come at a time when US exceptionalism is increasingly under scrutiny. Uncertain tariff policy has left businesses scrambling and cut into profit margins, and the rising US deficit has led to concerns about the status of US Treasurys as a safe-haven asset. That's not to mention the disruption that DeepSeek caused earlier this year, leaving investors wondering if US technological supremacy was as unrivaled as they once believed. A more optimistic tariff outlook is also boosting optimism. After the US and China dialed down trade tensions, Goldman Sachs raised its GDP growth estimates for China from 4% to 4.6% for 2025. The bank also raised its 12-month outlook for the Chinese equity indexes MSCI China and CSI300, pricing in an 11% and 17% implied upside, respectively. Nomura Capital also upgraded Chinese stocks to a "tactical overweight" in early May. Laura Wang, Morgan Stanley's chief China equity strategist, expects an increase in flows into Chinese equities within the next six to 12 months due to their low valuations and earnings growth outlook. She's eyeing increasing willingness among global investors to diversify into China, and Morgan Stanley has upgraded its MSCI China earnings growth outlook for this year by 2%. "There is a declining trend of US exceptionalism," Wang said on Bloomberg on June 5. "We are also seeing the technology breakthrough led by Chinese companies, which are potentially pushing up the ROE and earnings growth for MSCI China for the offshore space." While the Magnificent Seven have reigned supreme among US equities, China has its share of powerhouse companies investors might want to pay attention to. Goldman Sachs recently published a report identifying 10 of China's biggest stock market names with a buy rating, which the bank dubbed the "Chinese Prominent 10." These include Tencent, Alibaba, Xiaomi, BYD, Meituan, NetEase, Midea, Hengrui, and ANTA and span industries ranging from tech to pharmaceuticals. Some of these companies are already making waves both in and out of China. For example, the electric vehicle company BYD has generated sales comparable to Tesla and has expanded aggressively in Europe and Latin America. The bank believes these companies have the potential "improve their competitive and comparative advantages, generate positive equity returns for shareholders, and outperform vs. their industry peers in both the US and Chinese stock markets." Read the original article on Business Insider
