New policy blitz. China's central bank, the People's Bank of China (PBOC), has taken a proactive approach to bolstering the economy with a series of policy easing measures, surprising the market. These include reductions in Reserve Requirement Ratios (RRR) and adjustments to policy and mortgage rates (Table 1). These efforts aim to stimulate investment, enhance liquidity, and restore confidence in the financial markets. Addressing housing concerns will be essential to counter ongoing deflationary pressure.

The timing of these announcements could not be more opportune, capitalising on the tailwinds of supportive factors: liquidity inflow coinciding with the start of the US Fed’s rate cut cycle, a weakening US dollar, investors’ underweight positioning in China equities, and a general improvement in sentiment across Asia (excluding Japan) since the second quarter of this year.

In addition, the widening valuation gap has spurred investors to reassess their underweight position in China equities. At current level, the risk-reward dynamic appears favourable. At a forward PER of 10x (Figure 1), China equities are trading at a steep discount to the global average of 19x.

The jury is still out. While these policies take a hopeful aim at the sustained recovery of the stock market and broader GDP growth, the effectiveness and successful implementation of these measures remain to be seen. Nonetheless, these recent steps have undoubtedly boosted near-term sentiment and raised market expectations.

Unlike previous rounds of announcements, we believe this is less likely to be a false dawn. A robust ecosystem of favourable factors, both external and internal, supports this view. Effective implementation and sustained follow-through over the longer term could restore wealth effects and reinforce domestic consumption.

With global central banks lowering policy rates, China policy makers can breathe a sigh of relief. This backdrop presents the PBOC greater room for monetary easing, flexibility to inject liquidity into the system, stabilise the real estate market, and support a recovery in consumption. Moreover, lower global rates are supportive of risk assets in emerging markets which have underperformed since 2022.

Recommendations moving forward:

1. Reassess investment positions: For clients who are underinvested, this presents an ideal opportunity to revisit their portfolios. We suggest adding to large-cap and index heavy-weights, technology leaders, and quality growth stocks which are the forefront of favourable liquidity flows.
2. Income opportunities: On the income side, stay invested in large state banks for their reliable dividend yields which provide an attractive income stream for investors in an environment of falling rates. Historically, dividend payouts among China large state banks have remained stable over economic and interest rate cycles.
3. Targeted exposure: For investors who already have exposures in China, we recommend investing in structured products to expand their exposure at targeted entry points.

Supplementary tailwinds. Another potential tailwind supportive of improving performance over the longer term is the significant amount of cash on the sidelines. China’s total household deposits reached CNY126tn (USD18tn) at the end of 2023, surpassing total GDP value for the first time (Figure 2). Additionally, total bank deposits in the Hong Kong banking sector rose to a record USD2.2tn (Figure 3).

With the right policy initiatives and implementations, the former will be crucial to revitalising domestic consumption and reversing a precautionary savings mindset. Meanwhile, the latter will provide liquidity that can flow back into equities, seeking better returns in this declining rate environment.

More time needed on real estate issues. Nonetheless, the years-long real estate slowdown and inventory issues—widely regarded as the single largest challenge faced by the country in recent decades—remain a headwind to the near-term outlook (Figure 4). Considering its substantial impact, a government-led resolution of the housing debacle will be crucial to stabilising growth targets.

Valuations at floor. While we do not anticipate the market direction to immediately turn into a straight-line recovery, the combination of policy supports since 2023, current measures, and floor valuations (Figure 5) on low expectations will emerge as credible tailwinds to support the improving outlook.