Experts at Switzerland’s J Safra Sarasin Sustainable Asset Management share their insights on the outlook for China and its recent performance.

Chinese equities have rallied, despite more signals of macro weakness. This was highlighted on Friday by Mali Chivakul, emerging markets economist, and Wolf von Rotberg, equity strategist at J Safra Sarasin Sustainable Asset Management.

“Abundant liquidity, low interest rates, and unattractive bond markets have led investors towards the equity market. Retail investor participation has increased and could still rise further,” Chivakul and von Rotberg said in a note. “Our expectation of a payback to frontloaded policy support, however, should lead to a much weaker credit impulse in the coming months. That means that the outperformance of Chinese equities will likely be challenged unless meaningful policy support is coming later this year. That is not our base case.”

Except for exports, China’s monthly indicators came in broadly below expectations in July. Growth in industrial production and retail sales slowed, while fixed asset investment growth was very weak. Exports grew by 7 per cent and the pattern of higher growth in non-US markets offsetting the decline in exports to the US is continuing. The housing market has deteriorated further with falling home sales.

While China’s credit impulse remained positive and government bond issuance was still strong, bank loan growth was weak, and new bank loans fell, the firm continued. The People’s Bank of China's (PBoC) survey suggests that bank loan demand in the second quarter was the weakest since the survey started in 2005. The government’s new policy initiatives may have explained some of the weakness. It plans to introduce an interest subsidy programme in September for consumer loans. Consequently, borrowers  will have an incentive to repay existing loans in anticipation of new loans at lower interest rates. Moreover, the anti-involution campaign, which aims to stop the deflationary spiral, may have impacted industrial loan demand.

The weakness in July is in line with the firm's forecast of weaker third quarter growth (4.9 per cent year-on-year versus 5.2 per cent in the second quarter) and much weaker fourth quarter growth (4 per cent per year-on-year). The forecast is based on no extra fiscal stimulus this year. The firm expects the export engine to gradually weaken as global demand slows, and trans-shipment rules are tightened. A payback to frontloaded policy support should translate to weaker domestic demand.

Increased liquidity drives equity outperformance
Despite signs of increasing macro weakness, Chinese equities have rallied, the firm continued. Both the onshore and Hong Kong markets have risen. The MSCI China index has gained 8 per cent since the end of June. The outperformance has been driven mainly by ample liquidity in the system, lower returns on other assets, and increased retail participants in the equity markets. Better-than-expected news on the trade front has also lifted investor sentiment.

Policy easing since the beginning of the year has increased liquidity in the system. Monetary aggregates have risen, while interest rates have fallen further. At the beginning of 2025, the seven-day repo rate was close to 2 per cent. It has dropped to around 1.5 per cent most recently. It is likely that parts of the money growth have been driven by savers who have switched out of fixed income investment back to bank deposits. Bond yields have risen, driven by the anti-involution campaign as well as the US-China trade truce. As a result, bond returns have been flat, hence investors have moved away from the bond market.

More retail investors have turned to the equity market instead. In the onshore market, the number of new accounts for margin trading since last October has reached 1.3 million. This is higher than the number of newly-opened accounts for the entire year of 2023. Margin debt, which has correlated well with the performance of the onshore market, has risen significantly. It is important to note, however, that the current margin debt level is still far from the bubble level seen in 2015.

Equity versus credit relationship remains intact
Chinese equities have also been supported by increasing flows between the mainland markets and the Hong Kong market. Both northbound and southbound flows have picked up significantly since late 2024, the firm said. The question is whether this positive market development will continue. Even though Chinese equity performance overshot versus the credit impulse at the beginning of the year, the fundamental relationship remains intact. As the firms expects credit growth to moderate in the coming months, Chinese equity outperformance should also disappear. Another factor which has been particularly supportive over recent months was the currency. As the renminbi was dragged lower with the US dollar, Chinese earnings recovered relative to the rest of the world, in particular relative to Europe. With the US dollar and the renminbi likely to stabilise in the second half of the year, FX support for earnings is likely to fade somewhat and provide less upside potential for relative performance.

Meanwhile, Richard Tang, China strategist and head of research Hong Kong at Julius Baer, maintains an overweight stance on China’s market, whose bottom-up narrative has improved despite top-down macro challenges. See here.