Chinese assets riding high on state support

Financial markets in China went through a rocky start in 2025, barrelled by the US piling tariffs on one product after the other to end at an effective duty worth 145 per cent as of April. Chinese bonds performed steadily, with limited volatility throughout the first quarter of 2025, although we believe China’s benchmark interest rates have further room to decline.

Despite escalating tensions between Beijing and Washington, the renminbi exchange rate against the US dollar remained relatively stable. It is worth noting that while the RMB’s value against a basket of currencies had fluctuated only slightly over the past three years, it experienced a significant decline between January-March 2025. This suggests that the RMB actively depreciated against non-US dollar currencies, possibly in anticipation of impending tariff increases. Will these trends hold for the rest of the year?

US at arm’s length

The US is no longer China’s largest trading partner, with exports to the US accounting for less than 15 per cent of its total exports — a share that has been declining over the years, as seen in Graph 1. In contrast, shipments to Southeast Asia, particularly Vietnam and Malaysia, plus Russia and Latin America, are on the rise.

China still heavily relies on exports to other markets, and the depreciation against non-US dollar currencies could help stabilize overall export performance.

Signs of renewed vitality in China’s economy are emerging. First-quarter GDP grew by 5.4 per cent year-on-year, exceeding the 5 per cent full-year target. Main growth drivers were manufacturing and services, with e-commerce further boosting domestic demand.

Success in subsidies

The recently intensified trade war may put additional pressure on China’s export-oriented sectors, placing greater responsibility on domestic demand to sustain growth. China’s Two Sessions conference last March did not offer anything particularly new from the series of policies and incentives announced at the end of 2024, except further details and planning – and this is exactly the type of “consistency” markets favour.

Government support is also lifting the consumer side through various subsidies for household purchases, ranging from home appliances to services. Many local governments are also boosting subsidies through regional fiscal measures. Even for real estate, which has been severely impacted in recent years, additional subsidies are on offer tied to boosting birth rates. We believe that despite a challenging external environment, China’s accommodative fiscal policy and potential further monetary easing will help achieve its economic growth targets.

Rising capital inflows into Chinese assets in the first quarter also reflect improving expectations. Although Chinese equities remain underweight in the broader emerging markets portfolio, international investor interest in China has rebounded significantly compared to the pessimism that prevailed in the past two years. The brighter economic outlook is, of course, a major factor. Additionally, relatively low valuations of Chinese companies and portfolio rebalancing by investors have contributed to increased net inflows.

China reconsidered

One may say that years of US exceptionalism attracted substantial global capital, but with Republicans returning to power, concerns over policy uncertainty have led many investors to shift their focus to non-traditional safe-haven assets. Chinese assets now belong under this category in the current rotation, and global investors are taking notice.

The divergence in performance between offshore and onshore Chinese stocks last quarter is directly related to international investors’ positioning. As appetite for Chinese assets returns, the first beneficiaries are the most accessible offshore listings, as seen in Graph 2. The MSCI China Index – primarily composed of Chinese companies listed overseas – rose by 9 per cent between January-April 2025, while the CSI 300 Index composed of domestically listed Chinese firms fell by 4 per cent in the same period.

Furthermore, sector composition plays a role. For one, the two largest constituents of the MSCI China Index, Alibaba and Tencent, are leaders in China’s tech sector. The emergence of DeepSeek at the beginning of the year triggered a revaluation of China’s tech industry, with larger companies benefiting more. Another example is the consumer discretionary sector, where many companies in its sub-sectors choose to list overseas due to regulatory constraints. Current consumption stimulus measures have made segments like bubble tea shops more attractive to investors, leading to stronger stock performance.

Amid increased market volatility, Chinese tech stocks have followed their US peers downward, with companies that previously benefited from the DeepSeek spike shedding most of their gains. We believe they are oversold. These Chinese companies primarily operate domestically, and their valuations—whether compared to their own historical levels or to global peers—remain low. Their long-term benefits from riding the AI wave remain intact, suggesting significant upside potential over the next 12 months.

Among large-cap tech stocks, we favour companies with minimal exposure to cross-border e-commerce and local services as these sectors face either strong external headwinds or intensifying competition. Smaller tech companies with genuine AI integration, whether in management processes or product offerings, show significant potential for cost reduction and efficiency improvements. With agile Chinese firms, these gains could be quickly reflected in near-term earnings per share metrics.

For the consumer discretionary segment, it is necessary to differentiate across sectors. Adopting a “barbell strategy” will yield better results: focusing on either high-end discretionary spending (i.e., luxury jewellery retailers over mainstream ones) or low-end discretionary spending (where consumers retain the ability and desire for small indulgences amid a weaker economy); and avoiding mid-range segments (such as traditional auto parts and mid-tier apparel). Chinese assets may have seen the worst, and decisive actions taken domestically are propping up the economy when it is most needed. This lends confidence to our view that China should be a mainstay in the portfolios of growth-seeking investors.

This piece has been co-produced with Yiyi Capital Limited in Hong Kong, a China specialist and a part of a global financial services group.