Will China’s liquidity-driven stock rally keep going?

Goldman Sachs attributes the recent significant summer rally in Chinese equities, with A and H shares up 8-10% since August, primarily to liquidity, and expects further extension given that Chinese shares remain 26-34% below their 2021 peaks. The firm highlights supportive policy signals, under-allocated institutional and foreign investors, and potential reallocation of household excess savings from property as key drivers, while acknowledging policy shocks as the main risk but deeming a policy-engineered downturn unlikely. Consequently, Goldman maintains an overweight stance on China offshore and A shares, forecasting 10-12% 12-month returns for MSCI China and CSI300, respectively.

Analysis

Chinese equities have experienced a significant liquidity-driven rally since August, with A-share and H-share indices rising 8-10% despite soft macroeconomic data and stagnant earnings revisions. According to analysis from Goldman Sachs, this rally has further room to run, as Chinese markets remain 26-34% below their 2021 peaks, contrasting with many global markets at all-time highs. The firm's bullish outlook is underpinned by several factors: investor positioning is not yet overextended, with retail sentiment below prior peaks and institutional and foreign investors still maintaining underweight allocations. Goldman Sachs projects a potential 18% to 34% upside for the CSI300 if retail risk appetite returns to 2015/2024 levels. Furthermore, structural tailwinds, including the potential for a large-scale reallocation of RMB55 trillion in household savings from a weak property market, support a sustained shift into equities. While policy shocks are cited as the main risk, Goldman Sachs believes a policy-engineered downturn is unlikely. The bank maintains an overweight rating on Chinese shares, forecasting 12-month returns of 10% for MSCI China and 12% for the CSI300, raising its target for the latter to 4,900.

Key Decisions for Investors

• Given that institutional and foreign investors remain underweight and the rally is viewed as not yet overextended, investors should evaluate increasing exposure to Chinese equities to avoid the risk of missing further liquidity-driven gains.
• Adopt an alpha-over-beta strategy by focusing on sectors identified as having superior risk-reward profiles, such as TMT/Internet, consumer services, insurance, and materials, rather than pursuing broad market exposure.
• Maintain a vigilant watch on Chinese policy developments, as any abrupt liquidity tightening, regulatory shifts, or macroeconomic policy disappointments are the primary identified risks that could derail the current rally.
• Recognize that the current momentum is supported by a potential long-term structural shift of household savings from property to equities, suggesting that pullbacks could represent strategic entry points for long-term positions.