On the heels of a more optimistic trade pact reached between Beijing and Washington, investment banks have been increasing their growth projections for China. The deal, which includes a temporary halt to the majority of tariffs on each other’s products for 90 days, has prompted analysts to reassess China’s economic trajectory. These changes mean that Robin Xing and his team of data ninjas now expect that China’s second-quarter GDP could be even better than the 4.5% currently forecasted.
This positive shift comes amid an improving sentiment toward China’s internet and technology sector, which Lau has identified as particularly promising. In addition, Xing’s team expects China’s year-over-year growth in the third quarter to exceed 4%. Such projections streamline the good news from the recently signed trade agreement, which officials say will liven up the economy, particularly in targeted sectors.
Despite this optimism, challenges remain. China’s stock market is very much still guided by domestic fundamentals, which as we’ve seen are weak right now. On Tuesday, China’s CSI 300 index closed up just 0.6% – despite a strong Monday rise of 1.6%. In comparison, China’s Hang Seng Index rocketed almost 3% on Monday before plummeting 1.5% Tuesday.
The stage for these new moves was set by the continued turmoil in China’s property sector, which has caused increasing local government debt. Analysts caution that the market is still heavily dependent on state-backed help to get over these hurdles.
“The stock market still depends on domestic fundamentals, which remain weak,” stated Dan Wang, Eurasia’s China director.
Some investment heavyweights believe that big opportunities await, thanks to the disruption connected to the pandemic and social justice movements. Eddy Loh, chief investment officer at Maybank, pointed out the attractive risk-reward opportunities within communication services. He pointed to emerging promise across the board in the consumer discretionary sector. Addressing challenges as they are, he said, “market valuation is still pretty undemanding,” meaning there may still be upside potential in some quarters.
The trade truce has led to a significant amount of speculation surrounding its short-term effects on trade flows. As Morgan Stanley’s analysts recently pointed out, tariffs remain elevated. They are optimistic that this suspension will help increase shipments and production sooner rather than later.
William Ma, chief investment officer at GROW Investment Group reflected unshakeable optimism about the recent upturn of Chinese markets. He thinks this recent increase indicates a longer-term re-rating, not just a knee-jerk reaction to geopolitical developments.
Recent comprehensive policy easing will provide a short-term boost to China’s economy. Consumption stimulus initiatives will continue to bolster its burgeoning financial markets. Despite this favorable outlook, Lau cautioned that “a 90-day truce is short in trade diplomacy,” indicating that significant uncertainties remain ahead.