SUMMARY:
- 22V’s CHESS sentiment tool shows that analyst expectations for stimulus have declined in the last month, to a level around neutral; a key driver is the stabilization of US-China relations since the Trump-Xi meeting in late October.
- Analyst sentiment towards the macroeconomic outlook remains high, reflecting confidence in China’s exports due to reduction of trade tensions; our in-house view of the economic outlook is more cautious, given domestic headwinds and limited urgency to stimulate.
- Equity market sentiment remains high, in stark contrast to very weak sentiment for the property sector.
In our recent preview of China’s Central Economic Work Conference (report link HERE), to be held in mid-December (dates TBD), we emphasized that Beijing is unlikely to signal significant near-term stimulus – despite the fact that growth momentum continues to slide.
For another perspective on these dynamics, this report is our monthly update of the China Economic Sentiment Series (CHESS). CHESS uses ChatGPT to assess the sentiment of analysts commenting in China’s domestic media.
The main takeaway from the latest CHESS signals is that, like us, analysts do not have high expectations for near-term stimulus. That said, their views on the macroeconomic outlook are more optimistic than ours. Analyst sentiment toward the equity market remains quite high, in stark contrast to very weak sentiment for the property sector. Further details and charts below.
Stimulus Expectations Fade
The chart below shows analyst sentiment towards stimulus (orange line) versus sentiment towards the macroeconomic outlook (blue line). Stimulus expectations have faded since the summer and are now essentially at neutral, after a long stretch in positive territory since Beijing’s “policy pivot” in September 2024.
While the decline in CHESS stimulus expectations is consistent with our own view, there is an important nuance. CHESS stimulus expectations have declined as CHESS sentiment towards the macroeconomic outlook has improved, and as the US-China trade truce has reduced risks for exports (see further below). We see China’s growth outlook as more challenged, given the domestic headwinds from weak household confidence, ongoing property sector contraction, and fragile local government finances. Our subdued expectations for stimulus stem from our view that the policy reaction function has shifted, with China’s leadership less concerned about growth and focused on longer-term strategic goals centered on innovation.
We would also note that, as the five-year chart above shows, CHESS stimulus sentiment tends to lead macroeconomic sentiment. This implies that analysts’ growth expectations could follow stimulus expectations downward.
One factor in analysts’ positive view of the outlook is Beijing’s “anti-involution” campaign, and the hope that it can make progress in countering deflation and restoring pricing power for firms. Sentiment toward excess capacity (blue line below) and deflation-fighting (orange line) have improved since the launch of the campaign in the summer. We continue to be skeptical that the anti-involution campaign will have a lasting impact on deflation and excess capacity, as the main missing ingredient in Beijing’s strategy is stimulus that can help bring supply and demand back into balance.
External Sentiment Stabilizes
The chart below shows analyst sentiment toward China’s export outlook (orange line) and toward geopolitical risks, including trade tensions, faced by Chinese firms (blue line). For these series we use a 90-day rolling average (rather than a 30-day rolling average used above) to smooth out volatility and show the broader trend.
The key point here is that the months-long de-escalation of US-China trade tensions, plus the surprising resilience of Chinese firms to Trump’s tariffs, has brought sentiment towards the export outlook and geopolitical risks back to positive territory. Export sentiment is now at its highest level since before Trump took office.
The improvement in external sentiment is largely reasonable, as we see a low risk that US-China tensions re-escalate before US midterm elections next fall.
Equities Stay Hot, While Property is in the Deep-Freeze
We conclude by comparing analyst sentiment toward the equity market (orange line) and sentiment toward the property sector outlook (blue line). The divergence is stark, with equity sentiment at its highest level in the last five years and property sentiment near its bottom.
What to make of this? While Beijing’s policy pivot in September 2024 sought to stabilize prices for both equities and property, it has been far easier to do so for equities. The property market suffers not only from sector-specific issues, such as financial fragility of property developers (which may decline further as Vanke approaches a bond default), but also the macroeconomic headwinds from a soft labor market and weak household confidence.
Analysts – correctly, in our view – see Beijing as keen to support equities but as resigned to see property continue to weaken. As we argued in our CEWC preview, risks for equities are tilted towards the downside given the lack of near-term positive catalysts. That said, there is still a “policy put” in place – we would not suggest aggressively shorting the A-share market.
