Experts at Switzerland’s J Safra Sarasin Sustainable Asset Management share their insights on the outlook for China and its recent performance.
Chinese equities have rallied, despite more signals of macro
weakness. This was highlighted on Friday by Mali Chivakul,
emerging markets economist, and Wolf von Rotberg, equity
strategist at
J Safra Sarasin Sustainable Asset Management.
“Abundant liquidity, low interest rates, and unattractive bond
markets have led investors towards the equity market. Retail
investor participation has increased and could still rise
further,” Chivakul and von Rotberg said in a note. “Our
expectation of a payback to frontloaded policy support, however,
should lead to a much weaker credit impulse in the coming months.
That means that the outperformance of Chinese equities will
likely be challenged unless meaningful policy support is coming
later this year. That is not our base case.”
Except for exports, China’s monthly indicators came in broadly
below expectations in July. Growth in industrial production and
retail sales slowed, while fixed asset investment growth was very
weak. Exports grew by 7 per cent and the pattern of higher growth
in non-US markets offsetting the decline in exports to the US is
continuing. The housing market has deteriorated further with
falling home sales.
While China’s credit impulse remained positive and government
bond issuance was still strong, bank loan growth was weak, and
new bank loans fell, the firm continued. The People’s Bank of
China”s (PBoC) survey suggests that bank loan demand in the
second quarter was the weakest since the survey started in 2005.
The government’s new policy initiatives may have explained some
of the weakness. It plans to introduce an interest subsidy
programme in September for consumer loans. Consequently,
borrowers will have an incentive to repay existing loans in
anticipation of new loans at lower interest rates. Moreover, the
anti-involution campaign, which aims to stop the deflationary
spiral, may have impacted industrial loan demand.
The weakness in July is in line with the firm’s forecast of
weaker third quarter growth (4.9 per cent
year-on-year versus 5.2 per cent in the second quarter) and
much weaker fourth quarter growth (4 per cent per year-on-year).
The forecast is based on no extra fiscal stimulus this year. The
firm expects the export engine to gradually weaken as global
demand slows, and trans-shipment rules are tightened. A payback
to frontloaded policy support should translate to weaker
domestic demand.
Increased liquidity drives equity
outperformance
Despite signs of increasing macro weakness, Chinese equities have
rallied, the firm continued. Both the onshore and Hong Kong
markets have risen. The MSCI China index has gained 8 per cent
since the end of June. The outperformance has been driven mainly
by ample liquidity in the system, lower returns on other
assets, and increased retail participants in the equity markets.
Better-than-expected news on the trade front has also lifted
investor sentiment.
Policy easing since the beginning of the year has increased
liquidity in the system. Monetary aggregates have risen, while
interest rates have fallen further. At the beginning of 2025, the
seven-day repo rate was close to 2 per cent. It has dropped to
around 1.5 per cent most recently. It is likely that parts of the
money growth have been driven by savers who have switched out of
fixed income investment back to bank deposits. Bond yields have
risen, driven by the anti-involution campaign as well as the
US-China trade truce. As a result, bond returns have been flat,
hence investors have moved away from the bond market.
More retail investors have turned to the equity market instead.
In the onshore market, the number of new accounts for margin
trading since last October has reached 1.3 million. This is
higher than the number of newly-opened accounts for the entire
year of 2023. Margin debt, which has correlated well with the
performance of the onshore market, has risen significantly. It is
important to note, however, that the current margin debt level is
still far from the bubble level seen in 2015.
Equity versus credit relationship remains
intact
Chinese equities have also been supported by increasing flows
between the mainland markets and the Hong Kong market. Both
northbound and southbound flows have picked up significantly
since late 2024, the firm said. The question is whether this
positive market development will continue. Even though Chinese
equity performance overshot versus the credit impulse at the
beginning of the year, the fundamental relationship remains
intact. As the firms expects credit growth to moderate in
the coming months, Chinese equity outperformance should also
disappear. Another factor which has been particularly supportive
over recent months was the currency. As the renminbi was
dragged lower with the US dollar, Chinese earnings recovered
relative to the rest of the world, in particular relative to
Europe. With the US dollar and the renminbi likely to
stabilise in the second half of the year, FX support for earnings
is likely to fade somewhat and provide less upside potential for
relative performance.
Meanwhile, Richard Tang, China strategist and head of
research Hong Kong at Julius
Baer, maintains an overweight stance on China’s market,
whose bottom-up narrative has improved despite top-down macro
challenges. See
here.
