George Efstathopoulos
Looking back at 2024, Chinese equities delivered strong returns, outperforming most equity markets outside of the US equity market. However, it certainly didn’t feel that way last year, as Chinese equities were amongst the most volatile equity markets, exhibiting meaningful ebbs and flows. 2024 started with a deep correction followed by a strong rally after policy makers 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. And the common denominator behind many of these short-lived rallies in recent years has been that they were driven by hope.
This year, China has been one of the best performing equity markets and the question in everyone’s mind is whether this time it’s different. I’m inclined to say yes. Post the mini fiscal stimulus in Q4 2024, 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 responding to the subsidies, which sent a signal to both policy makers but also market participants that there is a strong link between fiscal stimulus and the Chinese consumer. 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 low China 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 pre-emptively 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 is where more of the action will be in Trump 2.0.
China’s January credit data also points to a solid start to 2025, comfortably surpassing consensus expectations and firmly pointing to growing policy support, while the emergence of Chinese AI and Deepseek challenges the view that China is vastly behind the US 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 investability 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 of ‘new 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 driving seat.
However, it is important that one should not discount hope. Should China also deliver additional fiscal headroom during the next NPC, we believe that this conviction will only grow stronger. Higher government spending driven by fiscal deficit expansion and rebounding credit impulse would help alleviate deflationary concerns and only 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 second of its dual circulation engines rather than just rely on exports. Doing so would not only help soften tariff headwinds, but more importantly help rebalance the economy and effectively address deflationary forces to create more sustainable growth. Also, a stronger China consumer can offer an alternative to US consumer dominance at a time of shifting dynamics for global trade.
The strength and exceptionalism of the US economy is largely driven by its tech superiority and the strength of US consumer, which makes 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 the Tech space. Should China deliver consumption-boosting fiscal and monetary policies, they 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 help fight its own deflationary forces, rebalance its economy and create more sustainable growth domestically.
By George Efstathopoulos, Portfolio Manager
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