Monetary policy in China has followed a different trajectory from the US and other major central banks, as interest rates in China have been trending lower, with 10-year yields in the US now higher than in China for the first time in over a decade.
In our analysis, investor sentiment and valuation in Chinese equities are currently at unsustainable lows. As such, we are positive on the relative case for the Chinese equity market’s prospects as we move into the latter part of this year. While we can expect the realisation of some degree of slowing growth, policy tools are available to underpin the economy so it should not be fully de-railed.
We have identified several positive catalysts that could help China’s market recover. These include an easing of zero-Covid restrictions, a reduction in geopolitical tensions and clear evidence of no further tightening in the regulatory environment. We see reasons for optimism in each area. The government is likely to continually adjust Covid-19 policies — driving greater economic resilience and flexibility in the face of localised restrictions—and utilise flexible policy tools. We anticipate stabilisation in earnings revisions, and a regulatory shift towards implementing previously announced policies versus incremental new tightening measures.
