By Vivian Lin Thurston, portfolio manager at William Blair Investment Management
China’s domestic policy approach remains tepid as one critical issue remains – the absence of a ‘show me the money’ moment. The country needs a significant, confidence-boosting intervention to support consumption, complete unfinished property projects, and stimulate the broader economy.
The US election result has also heightened the sense of urgency, and President Trump has now followed through with his threat to impose tariffs. This poses a major challenge to China’s export-driven economy.
China’s equity markets showed resilience in 2024 but remained heavily influenced by policy, reflecting the underlying economies’ lack of a clear direction. The outlook for China’s equity market remains dependent largely on whether the government can implement policies that shift the economy from a reliance on state-driven initiatives to a more market-oriented growth model.
The National People’s Congress (NPC) unveiled a 10-trillion-yuan package in November last year, a measure better characterised as a debt restructuring rather than traditional stimulus.
This package comprises two primary components: a 6-trillion-yuan increase in the local government debt ceiling over three years, aimed at repaying hidden debt in local government financing vehicles (LGFVs), and 4 trillion yuan in special bond issuance over five years to address the same liabilities.
While these measures are expected to alleviate some of the fiscal strain on local governments and reduce default risks, they fall short of delivering the type of targeted stimulus required to invigorate the economy. Key sectors such as consumption and services, which are essential to long-term growth, remain underfunded.
The defining factors of Chinese equities
The Chinese equity market’s performance in 2024 can be divided into three distinct phases. The year began with optimism about potential stimulus measures, resulting in stable market conditions. Export-driven industries thrived, and first-quarter earnings offered hope for quality growth investors.
This optimism faded by mid-May when anticipated stimulus measures failed to materialise. A significant market downturn followed, as second-quarter GDP figures came in well below expectations. Growth forecasts were revised downward, and deflationary pressures grew, prompting investors to shift from growth stocks to low-valuation and high-dividend-yield options.
The third phase began in mid-September with a sharp rebound, as Chinese equity valuations hit 15-year lows, attracting institutional investors, including US hedge funds. This rally gained further momentum after President Xi Jinping’s late-September Politburo meeting emphasised economic support, complemented by additional monetary easing from the People’s Bank of China (PBOC).
However, by October, the rally lost steam as markets recognised the lack of substantial follow-through on stimulus measures.
Despite the rollercoaster year, China’s equity markets delivered strong returns, with the CSI 300 Index up 14.7% in dollar terms at the end of 2024 and the MSCI China Index up 19.7%. Only the US S&P 500 Index performed better, surging by more than 23%. However, the policy-driven nature of the Chinese market and its volatile sectoral leadership have made it challenging for quality growth investors to navigate.
Looking ahead
The Chinese government must prioritise restoring consumer confidence to revive economic activity. A protracted cyclical downturn, exacerbated by weak consumer sentiment, rising savings rates, and an underperforming property market, has created significant headwinds for sustainable growth.
Targeted policy measures to address the property sector’s structural issues and support service industries—which provide critical employment opportunities for younger workers—are essential. Without such measures, China risks a deflationary trajectory reminiscent of Japan’s lost decades.
Green shoots
Certain sectors offer glimmers of hope for quality growth investors. The technology sector, particularly internet-related industries, is recovering, with Tencent posting strong 2024 earnings driven by a rebound in online advertising and gaming. E-commerce is also gradually recovering, despite intense competition.
The power equipment sector benefits from rising electrification trends and AI-driven demand for data centers, highlighting years of underinvestment in power infrastructure. Chinese manufacturers with strong domestic and international markets have the potential to gain from this structural growth.
China’s semiconductor hardware industry also appears poised to grow, supported by demand from electric vehicles, high-end manufacturing, and energy transition technologies—key areas in President Xi’s strategic push for technological advancement and reduced reliance on foreign suppliers.
Balancing global trends and domestic challenges
The road to a more sustainable and market-driven Chinese economy remains fraught with challenges. Policymakers must act decisively to implement measures that bolster consumer confidence, resolve structural inefficiencies in critical sectors, and adapt to shifting global trade dynamics.
For investors, 2025 presents a mixed picture. There are opportunities in sectors aligned with global megatrends, but navigating this policy-driven market will require a cautious and selective approach. Without decisive government action, China’s growth story risks stagnation, leaving both the economy and equity markets vulnerable to external and internal pressures.