Changing the Consumer Mindset

China's equity markets have been in a lull due to uncertainty surrounding US trade negotiations and the extent of government stimulus to offset export weakness, with policymakers reiterating a growth target of around 5%. Consumer confidence remains below pre-COVID levels, reflected in increased household bank deposits, but government policy is expected to remain supportive for equities. Onshore market liquidity has surged to RMB 2 trillion in 2024 due to increased dividends and share buybacks coupled with a clampdown on equity issuance, suggesting limited downside for China A-shares.

Analysis

China's equity markets have entered a period of consolidation following tariff-induced volatility in early April, primarily driven by uncertainties surrounding ongoing US-China trade negotiations and the anticipated scale of government stimulus to counteract export weakness. Despite these headwinds, policymakers have consistently reiterated a GDP growth target of approximately 5%, signaling an expectation of further policy measures, particularly as recent housing market data indicated a modest decline in property prices. A significant challenge remains the revitalization of consumer confidence, which, although recovering from its 2022 lows to 88.4, still lags considerably behind the pre-Covid typical level of around 120, contributing to a surge in household bank deposits to over USD 20 trillion. The government is actively seeking to shift this consumer mindset towards a more 'risk-on' approach, with a notable focus on supporting the private sector, technology, and AI. Critically, onshore market liquidity has experienced a substantial boost, with 'net liquidity' in China A-shares reaching RMB 2 trillion (USD 275 billion) in 2024. This surge is attributed to increased dividend payouts, a doubling of share buybacks prompted by regulatory encouragement and PBoC refinancing programs, and a significant reduction in equity issuance, which historically averaged 1-2% of total market capitalization. Coupled with direct state support through ETF purchases, these factors suggest that the downside risk for China A-shares is currently quite limited.

Key Decisions for Investors

• Given the substantial RMB 2 trillion increase in onshore market liquidity during 2024 and explicitly supportive government policies, investors may find that downside risks in China A-shares are relatively contained, warranting a cautiously optimistic outlook for selective investments.
• It is crucial to monitor key inflection points such as shifts in consumer confidence (currently at 88.4 versus a pre-pandemic ~120), the materialization of further government stimulus measures aimed at unlocking over USD 20 trillion in household savings, and any developments in US-China trade relations.
• Consider focusing on sectors aligned with stated government support, notably technology and AI, as well as companies exhibiting robust capital return policies through enhanced dividends and share buyback programs, which have doubled in 2024.