What's changed in China?

Tactically, quite a bit. Strategically, nothing!

We were debating about whether it was time to start getting bullish on China given the markets have been seeing some positive price action over the last couple of weeks. There’s chatter in the markets that people are taking long positions and we wondered whether there was a reason to be long China here.

So we asked ourselves: What's changed?

The answer: Strategically, nothing!

The Government is still reluctant to step up stimulus measures and the property market continues to be a drag. Not to mention, trade sanctions are getting tougher and China's not focused on rapid growth right now.

So then where is this surge in equities coming from? Well, it's the cycle. When we look at the numbers from last year, China hit a cycle low, and based on rates of change, we're seeing more promising results. So tactically, there may be opportunities in Chinese equities, and the momentum suggests just that. But, on a longer-term horizon, we don't see a case for getting bullish here as a strategic asset allocation, just yet.

We, however, want to discuss this now because there may be some upside in equities for the short term. Near-term macro data is improving and may continue at least into Q3 and what China is doing with their currency is very curious.

What we cover:

The Case for Short-Term Upside - Tactical Position

Last year, as China came out of the Covid lockdowns, we were all hopeful that growth and spending would come rip-roaring back for China and the stock market would simply take off. Instead what we got was almost a -12% decline in Mainland Equities and a -14% decline in the Hang Seng Index.

Progressively, we began to see more and more negative macro data coming out of China, and that largely weighed on equities in the absence of monetary or fiscal measures.

We’re starting to see some light, as far as the near-term macro data is concerned. It would seem that many of the data points have hit a cycle low, have bottomed, and are reversing the trend.

We should remember that when the base is low, the comparisons become easier on a year-on-year basis Nevertheless, some of the data is also picking up in the face of global reflation.

Monetary Policy and Currency

As we wrote this morning, there seems to be a controlled depreciation of the currency in China, which makes sense to a large extent given that the country is contending with deflation (one inflation print doesn’t make a trend). It’s likely also to support exports amid trade sanction threats. We also think that they were trying to prevent depreciation because of all the USD-denominated debt.

Other tailwinds also include a probable cut to banks’ Reserve Ratio Requirement (RRR) and the Loan Prime Rate (LPR). This could foster some improvement in spending in the near term and give equities somewhat of a boost.

Industrial Production and Activity Data

Industrial Production, industrial profits, and activity data are all improving from weaker bases.

PMIs have improved other than the Official manufacturing PMI (Large Caps), which still remains in contractionary territory.


The last CPI print for China came in positive, i.e., they are seeing inflation for the first time since Oct 2023. This was mainly attributed to the Lunar New Year holiday spending - while fresh food prices increased, so did consumer discretionary items. So the explanation makes sense.

The PPI data is still negative but, we are seeing global reflationary forces and rising commodity prices. This will likely lead to some inflation in China at least until July - August when the negative base effects kick in.


Exports are starting to improve as well. Again this is also because of the cycle and base effects.

We’re still early in this cycle and the monetary policy and fiscal stimulus will be key to the sustainability of growth and this cycle. As we will see next, nothing has really changed in the grand scheme of things and that presents a problem when thinking about China for the long term.

Structural Challenges Persist in China

As we progressed through last year, the economic data started to become worse and there was remarkable evidence that the country was just not ready to support the high growth that they had once experienced. Property Developers experienced large-scale defaults, local government debt soared and there was a crisis of confidence among consumers.

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