It's China's time, again

What happened

The investment landscape for China has fundamentally shifted in recent months, creating a compelling entry point for strategic investors.

The tariff war is de-escalating, and with its rate rollback and 90-day suspension, the Geneva accord paves the way for further progress. Corporate earnings, particularly from tech giants, have been robust, also helped by renewed government support. The rise to prominence of fiscal policy in assessing investment decisions is part of our key working hypothesis for 2025.

Adding momentum to this narrative, China's central bank cut benchmark lending rates for the first time in seven months, reducing the 1-year loan prime rate to 3.0% and the 5-year rate to 3.5%, while simultaneously implementing a comprehensive policy package targeting employment stability, consumption growth, and high-quality development.

Impact on our Investment Case

Our assessment of these evolving dynamics is informed by research meetings with our Chinese partner, whose local market perspective provides valuable insight into policy implementation and market sentiment shifts.

The Xi Put: Presidential economics

Much like the Federal Reserve's implicit promise to support markets during times of crisis, China now operates under what we call the "Xi Put." This represents President Xi Jinping's commitment to economic stability and growth, backed by the authority of the Chinese state and its policy arsenal.

Xi Jinping's political legitimacy depends heavily on economic performance, making the "around 5%" GDP growth target a political necessity. This creates a dynamic where the world's second-largest economy operates with an implicit guarantee that policymakers will deploy whatever tools are necessary to prevent significant economic deterioration.

The Chinese leadership's preference for targeted, fiscally-driven interventions that can directly influence consumption patterns and technological development is proof in the pudding. The 300 billion yuan allocated for trade-in programs represents direct fiscal injection into consumer spending, while the opening of nine new pilot cities for services sector liberalization demonstrates targeted fiscal intervention to rebalance growth drivers toward domestic demand.

While global central banks have limited remaining ammunition after years of ultra-low rates, the People's Bank of China maintains relatively restrictive settings with positive real rates, providing significant room for supportive easing. The central bank's 5 trillion yuan in state investments and new policy-based financial instruments provide substantial resources that will likely be deployed in service of fiscal priorities.

China's preparation for prolonged trade tensions has revealed economic resilience, with the economy prepared to absorb tariff escalation. The DeepSeek breakthrough in AI efficiency exemplifies this technological independence, showing that export controls have paradoxically accelerated China's innovation capabilities.

The Pan Put: market architecture reform

While Xi Jinping provides the economic backstop, Pan Gongsheng, Governor of the People's Bank of China since July 2023, has architected comprehensive market reforms designed to stabilize Chinese equities.

In addition to the ETF purchases by the "national team", Pan's reform agenda extends beyond regulatory adjustment to philosophical change. The mutual fund reform plan introduces floating management fees tied to performance benchmarks, fundamentally altering incentive structures for asset managers while creating structural support for equity valuations. By linking fund manager compensation to benchmark performance over three-year cycles, these reforms should reduce volatility while improving market efficiency.

The reform framework includes practical infrastructure improvements, e.g., the fast-track ETF registration process, compressed to five working days, demonstrating commitment to market accessibility.

Strategic positioning advantages

The convergence of policy support occurs as China's strategic advantages become increasingly apparent. Technology leadership extends beyond the DeepSeek demonstration, encompassing dominance in AI patents, electric vehicle production (now representing 32.3% of global output and with BYD overtaking Tesla in terms of units produced), and control of rare earth elements critical for energy transition. China's educational advantage, producing more STEM graduates (degrees in the fields of science, technology, engineering, and mathematic) than the US and EU combined, provides sustainable competitive advantages that export controls cannot easily erode.

From a portfolio perspective, China A-shares maintain low correlations with global markets. Over the past 10 years, the average correlation between the CSI 300 and the MSCI ACWI has been 0.29, as shown in the chart below. These stocks offer genuine diversification benefits, particularly at a time when correlations between traditional assets are increasing elsewhere.

Valuations have reached compelling levels, with Chinese equities trading at a 40% discount to MSCI World despite the CSI 300's reasonable 12.5x P/E ratio near historical medians. Technology stocks present particularly stark opportunities, with TMT shares trading at just 12.9x P/E compared to their historical 30x median. These valuation metrics align with an analysis from our Chinese partner, reinforcing our view that the multiples compression was driven by the confrontational approach taken by the government when facing tech giants in the recent past. However, as the regulatory approach is reset and pivoting to supporting tech companies in the global AI competition, multiples have expanded again.

Savings redirection, an opportunity in the making

A critical but underappreciated dynamic supports the equity investment case: China's massive savings pool (representing almost 40% of GDP) awaits redirection. With real estate markets recovering from their correction, Chinese household savings have flowed predominantly into bonds and money market funds (now 25% of total household savings, according to JPM estimates), driving 10-year government yields to historic lows. This represents approximately 15 trillion yuan in household financial assets seeking higher returns.

The combination of ultra-low bond yields, attractive equity valuations, and improved market infrastructure creates conditions for a substantial asset allocation shift. Fiscal policy measures targeting household consumption and investment incentives could catalyze this reallocation, potentially providing sustained demand for domestic equities independent of international flows.

The magnitude of this potential shift cannot be overstated. Chinese household savings rates remain among the world's highest, and the gradual redirection of even a small percentage toward equity markets would provide substantial support for valuations. This domestic demand story complements rather than competes with international investor interest, creating multiple sources of potential capital inflows.

Our Takeaway

The convergence of Xi's economic backstop and Pan's market reforms creates an asymmetric investment opportunity in Chinese assets. The binary risk scenario that dominated markets through April, insufficient policy response versus trade war escalation, has resolved favorably on both fronts, removing key overhangs.

The policy framework combining Xi's economic commitment with Pan's market reforms, supported by potential savings redirection, provides the foundation for sustained outperformance. Continued fiscal-led policy support, potential weight increases in global indices, and earnings recovery should drive alpha generation for investors positioned ahead of this inflection point.

Adding exposure to Chinese equities is something we have been steadily implementing across our strategies over the past few months. We particularly favor technology companies benefiting from renewed government support and compelling valuations. Our China tech-specific product is a testament to our commitment in this field.