China Perspectives - Economic bifurcation supports structural allocation into domestic demand winners

Highlights: Chinese stocks are lifted by news flow of potential fresh policy support related to property, excess capacity and more fiscal stimulus. While these policy related news and signals lacked details, they showed how a bifurcated economic story can continue to drive up policy expectation, ahead of this month’s Poliburo meeting. Strength in retail sales data, AI-led application and adoptions are supporting our Mild Overweight on China equity. Externally, while much uncertainty still exists on the US-China trade talks and transhipment clause with regards to 3rd countries, we see the situation stabilising and near-term risk to equity sentiment contained.

• Policy related news is driving up Chinese stocks ahead of the July politburo meeting, even though details remain sketchy. These include speculation about more support China's property sector, government’s open calling for a crackdown on price wars to address excess capacity and reported proposals by PBoC advisors of a RMB1.5 trillion stimulus to boost consumer spending
• Recent data still points to a bifurcated economic picture, lingering deflationary pressure on one hand and silver linings in consumer resilience. Our policy expectation remains tempered – i.e. no bazooka stimulus but a cocktail of well-paced measures aiming at transitioning the economy towards new growth engines, in particular structural measures to lift retail confidence. In the meantime, the government indeed has a reserve of cyclical tools to tap should internal and external conditions call for them
• In China equities, valuations remain attractive both historically and relative to other markets, with the spread between dividend yields and bond yields at historical highs. Domestic capital inflows are also providing liquidity support. We maintain a Mild Overweight on China equities, favouring software and AI application, policy-supported consumer sectors, and dividend assets