CHINA: Key Takeaways from 22V’s Annual Investor Trip

22V Research led a group of international investors to Beijing and Shanghai last week for our second annual “China Macro” trip. We engaged with economic officials, think tank and academic economists, industry experts, journalists, and domestic investors on a broad range of topics.

SUMMARY:

• Macro: Economic sentiment has improved from the depths of last year but is hardly cheery; activity has slowed since June and contacts uniformly expect growth to remain subdued in coming quarters and deflationary pressures to persist amid soft domestic demand.
• Equities: Contacts see justifiable reasons why the equity market has continued to rise despite a weak macro backdrop, including strong policy support, a positive tech story, inroads into overseas markets by Chinese firms, and a reallocation into stocks by investors facing few alternatives; some question how much further the rally can climb without an improvement in the fundamentals, but few think that recent gains are in danger of reversing.
• Stimulus: There will be modest fiscal stimulus in Q4, as necessary to stabilize but not reaccelerate growth; there is limited near-term scope for monetary easing, but contacts expect rates to remain low for the long term and potentially approach zero.
• Anti-Involution: There is broad skepticism that the anti-involution campaign will reduce excess capacity and deflation at the macro level; however, contacts are more optimistic that measures will lift profits in some targeted sectors, such as clean technology.
• US-China: China’s export sector can tolerate the current level of U.S. tariffs, which reduces the pressure on Beijing to make major concessions to Washington; even with a potential TikTok deal, contacts have limited expectations for what a Trump-Xi meeting later this year might deliver for the economy.
• Politics and Reforms: As Xi Jinping prepares for a fourth term in 2027, he is granting somewhat more autonomy to his economic team to implement pragmatic policies; however, there are low expectations for structural reforms ahead of the October plenum meeting, which will preview the 15^th Five-Year Plan.

ECONOMIC OUTLOOK

Economic sentiment has improved compared to our trip at this time last year, when the mood was grim, and the fiscal problems of local governments were creating concerns for social stability. China’s September 2024 policy pivot has provided some lasting reassurance that China’s leadership is less complacent about the economy and determined to stabilize expectations. The US-China trade war has also been less punishing than many feared, with China’s export sector proving fairly resilient and contacts broadly confident that April’s tariff tit-for-tat marked the peak of tensions. A surge in equities to ten-year highs, and optimism over China’s competitiveness in high-tech sectors such as electric vehicles, are bright spots.

That said, the mood towards the economy is hardly cheery. Deflation is no longer accelerating, but appears more entrenched than ever. Property is in a double-dip, and contacts are resigned to only incremental policy support. Chinese households are a bit less cautious in their spending than last year, but this reflects adjustment to a “new normal” rather than renewed confidence in their job/income prospects or home values. The labor market is soft, with construction jobs dried up, service sector jobs lagging behind the pre-pandemic trend, and even large manufacturing companies hedging risks by hiring workers on temporary contracts. Youth unemployment remains high (above 15%), and contacts increasingly see evidence that AI is further dampening demand for college graduates. That this is not viewed as a source of social stress is in large part because their working age parents are covering their children’s expenses.

Growth Outlook: Contacts broadly expect activity to remain weak in coming months given headwinds from property and exports, with incremental stimulus in Q4 likely to stabilize growth at a low level. The start of the 15^th Five-Year Plan in 2025 may provide a marginal boost as newly approved investment projects commence, but the economy next year will look and feel much like this one, as the main headwinds persist:

• Property will continue to weigh on growth but the policy debate has moved on. Contacts express a mood of resignation towards the housing sector. China’s leadership will not take bold measures to stimulate property (such as steep rate cuts or using central government funds to buy unsold inventory) and aims merely to slow price declines in the largest cities. Contacts expect only incremental support policies in coming months and do not see a bottom anytime soon.
• Consumption will remain subdued as households face a weak labor market and falling property prices. While boosting consumption remains a top focus of the leadership, policies remain targeted and hesitant amid ongoing debates about the best strategy. Beijing recognizes that the consumer trade-in program for durable goods generates diminishing returns and will shift some subsidies to non-durable goods and services. Broader efforts to boost consumption – such as childbirth policies and subsidized pre-school – are steps in the right direction but the scale is small. Contacts note that strengthening the social safety net and reforming taxation are critical to reducing high rates of household saving, but the politics are thorny and progress is frustratingly slow.
• Exports have been resilient but will slow in Q4. Contacts broadly see China’s export sector as able to tolerate the current level of US tariffs, with export competitiveness helped by domestic deflation (falling export prices) and depreciation of the CNY against major non-dollar currencies. That said, the end of export front-loading will increase headwinds in Q4. A major shipping and logistics company noted that purchase orders and cargo orders point to a coming decline in China’s exports to the US ahead of the holiday shopping season. This suggests US retailers are being careful to protect margins in the face of tariffs, with some risk of a rise in shipping costs if US consumer demand is stronger than expected and inventories run low.

Stimulus Outlook: Contacts expect Beijing to provide just enough stimulus in Q4 to stabilize growth and meet the full-year GDP target of “around 5%.” Because of a strong first half performance, this would only require H2 growth of around 4.5%.

Stimulus policies for the remainder of the year will be a “little bit of everything”:

• A modest (0.5-1 trillion yuan) package of fiscal and quasi-fiscal stimulus through policy lending by the state banks, advancing a portion of local governments’ 2026 bond issuance quotas, and potentially an increase in central government bond issuance. The focus of fiscal spending will be on infrastructure and other investment, though Beijing’s continued efforts to rein in local government debts limits the pace of spending and impact on real activity.
• Contacts expect limited near-term monetary policy easing this year, but see rates as headed lower – possibly even to zero – over the long term. The PBOC remains reluctant to aggressively ease monetary policy due to: (1) concerns over further eroding banks’ already narrow net interest margins, which would pressure capital adequacy and their room to lend; (2) fears that easing will do little to boost growth but would instead direct liquidity to undesirable areas such as sectors facing overcapacity; and (3) the fact that deposit rates are already very low, limiting an important source of income to household savers. Nonetheless, contacts see low rates for the long-term as largely inevitable given an economy facing deflationary pressure and the risk of fiscal dominance as the authorities grapple with a heavy government debt burden. Some contacts see an eventual move towards zero rates as probable, with China retreading Japan’s experience.
• A further easing of property measures in large cities, which will only have a modest/temporary impact on sales and prices.

DEFLATION AND ANTI-INVOLUTION

• Contacts see the State Council as increasingly worried about deflation – one motivation for the “anti-involution” campaign – but unlikely anytime soon to approve the aggressive fiscal and monetary stimulus necessary to decisively break out of a deflationary cycle.
• Contacts were uniformly skeptical that anti-involution policies will be effective in fighting deflation at the macro level. They believe that China’s government has a limited appetite for the scale of cuts to investment and production that would be necessary to address excess capacity and deflation across sectors, and argue that strong demand-side stimulus will be necessary for price increases to be passed on to downstream customers.
• At the same time, many contacts believe that anti-involution may improve prices and profits, at least for a time, in specific targeted sectors (and thus help equities). They see the focus of the campaign as the “new three” clean tech industries – electric vehicles, solar photovoltaics, and lithium batteries – where some consolidation will take place. But the broader scope of the campaign remains unclear: economic agencies and industry associations are grappling to respond to the leadership’s call to fight anti-involution, but the strategies and their effectiveness will vary by sector. Political pushback from local governments seeking to protect their firms will be a key source of resistance.

EQUITIES

Since June, Chinese equities have continued to make new highs while the economy has weakened. The divergence between stocks and the underlying economy naturally raises concerns about the sustainability of the current rally. We assess that the risk/return balance will be less favorable in coming quarters, given that equity valuations have caught up to their historical means (though are still cheaper than in the US) and that the macro outlook will remain subdued. However, conversations on the ground made us less concerned about the current level of equities and somewhat more optimistic that the divergence between stocks and macro is justified.

Contacts cited the following drivers for the equity markets performance:

• Strong policy support. Contacts see September 2024 as the turning point for Chinese equities – specifically, the PBOC’s introduction of lending facilities to support equity purchases, backed by potentially unlimited firepower. While the uptake of the facilities has been limited, the move signaled the leadership’s determination to revive the equity market. The direct wealth effects are small, but Beijing sees the equity market as a barometer of confidence, a source of financing for China’s high-tech companies, and – importantly – necessary to provide the long-term returns for insurance funds and household assets to meet the needs of an aging population. The use of the “national team” to support equities during April’s tariff escalation further strengthened confidence in an implicit put on the market. Another form of support is the set of capital market reforms, introduced in April 2024, that aim to make the equity market more attractive to investors by promoting greater dividend payouts and stock buybacks, tightening listing requirements, and forcing institutions to increase equity allocations (insurance funds have been required to allocate 30% of assets to stocks). Contacts give securities regulator WU Qing (installed in February 2024) positive grades for overseeing these efforts. Wu has also limited IPO approvals to restrict supply and support equity prices, and this seems likely to continue. Outlook: Policy provides an underlying base of support for equities but may not drive further gains in the near term.
• Increased stock allocation by households and institutions + TINA (“there is no alternative”). Domestic institutional and retail investors have boosted their allocations to A shares this year from low levels. Direct household participation in the equity rally has been modest, but there has been indirect participation through bank wealth management products. With cuts to interest rates, the return on deposits and low-risk money market funds are only slightly above 1%, while the trailing dividend yield for stocks in the CSI 300 is 2.4%. Outlook: Contacts see more room for households to shift savings into equities over the long term, given the lack of attractive alternatives in property and fixed income.
• Greater confidence in China’s tech story. The DeepSeek moment of January 2025 was one part of a broader surge of confidence in China’s tech and advanced manufacturing prowess, which include: the inroads of China’s electric vehicle brands, the progress of domestic semiconductor companies in designing advanced chips, approval of advanced treatments by domestic biotech firms, and ongoing competitiveness of domestic AI models and applications not only within China but also overseas. Outlook: the domestic innovation story is very real, but the patriotic narratives around self-sufficiency in AI and chips are already at a fevered pitch.
• Strong revenue growth for Chinese firms overseas. Several contacts emphasized Chinese firms’ strong overseas sales – including at the high end of sectors such as electric vehicles – as a key source of support for equities and earnings amid a deflationary environment at home. According to one strategist, there are over 500 listed Chinese firms (representing 10% of A-share market cap) with more than 50% of revenues from overseas and this group has substantially outperformed. Outlook: While China’s exports face global pushback, the overseas sales of listed firms – including through shifting production abroad – likely have room to run; the strategist above noted that overseas sales account for 15% of A-shares revenues, which compares to around 28% for the S&P 500. This is also a risk to international competitors, as Chinese firms hardened by ruthless domestic competition seek global market share in advanced sectors – the path laid down by Chinese EV companies.
• The weak dollar, which encourages domestic and foreign inflows into China. Outlook: contacts expect the CNY to trade in a narrow range against the dollar, with exporters and domestic markets benefitting if the dollar remains weak on a broad basis.
• Stabilization of US-China relations since June. Outlook: Further gains to China’s economy are limited, as major U.S. tariff relief seems unlikely (see further below).

US-CHINA

• The announcement on Friday (after our trip) that Trump and Xi will meet at APEC in South Korea – rather than in China – aligns with view among contacts that the summit will be short on economic deliverables. China’s resilient exports mean that Beijing is not under heavy pressure to make major concessions to Trump. Contacts anticipated that the Trump-Xi call would send positive signals on TikTok; Beijing views approval of TikTok’s sales as relatively low-cost but will seek to avoid a perception domestically that it is caving in to Trump – hence Beijing’s insistence that TikTok is part of a broader “framework” in which the US will respect the rights of Chinese enterprises. The most ambitious outcome that contacts expect would be Trump forgiving a portion of tariffs imposed over the fentanyl issue, in exchange for Chinese commitments to purchase US goods (primary agriculture).
• Observers view the US and China as in a race to limit their respective tech and supply chain vulnerabilities. China’s rare earths dominance provides a deterrent against US export restrictions, while Beijing directs all efforts to fostering a self-sufficient technology stack in AI and semiconductors. Most contacts are positive about the long-term outlook for China’s domestic chip sector, but some express concerns regarding over-confidence in the ability and desirability of the drive for total self-sufficiency.

POLITICS AND LONG-TERM REFORMS

• More scope for pragmatic measures: While Xi Jinping will almost certainly stay on for a fourth five-year term as China’s leader in fall 2027, contacts report that Xi is allowing somewhat more autonomy for the cabinet (State Council) to pursue growth-friendly policies. Xi is surrounded by long-time protégés and thus is more willing to delegate than in the past. In power since 2012, he is stepping back from day-to-day management of economic issues while continuing to focus on politics and foreign policy issues. Premier Li, who heads the State Council, spent his career in the entrepreneurial environment of the coastal provinces and is viewed as pragmatic and supportive of private business. That said, there are limits to this autonomy. Xi continues to oversee broad policy, and contacts see little prospect for fundamental shifts such as bold stimulus or major market reforms.
• Low expectations for the upcoming plenum and 15^th Five-Year Plan reform agenda. The CCP will hold a plenum meeting in October to preview the next Five-Year Plan. Contacts expect the FYP to focus on promoting long-term consumption and tech self-reliance, but have little sense yet as to the specific policy goals or nuances. The focus on consumption is welcome but there is broad skepticism that Beijing will take an aggressive approach to the structural measures necessary to accelerate economic rebalancing, such as shoring up the social safety net. A key stumbling block across many fronts is the need for fiscal reforms to narrow the gap between what local governments collect in revenue (permanently impaired by the collapse of the property sector) and their large spending responsibilities. Contacts do not see major fiscal reforms on the horizon.
• Contacts believe that the Five-Year Plan will set an annual GDP growth target of either 5% or “at least 4.5%.” A higher growth target would not necessarily be bullish, as it would maintain pressure on manufacturing investment to carry growth and provide less scope for tackling excess capacity. A target of “above 4.5%” is seen as more reasonable but will still be ambitious given a slowing population and rising debt burdens.