China Perspectives - With trade talks back to the sketching board, domestic drivers matter more

Highlights: The upside surprise in the Sino-US Geneva deal has dialled down the tail-risk calculation and marks the beginning of rationalised bilateral trade talks in the coming months. For China equity investors, though the trade negotiation dynamics remain fluid, the expectation on sustainable export strength is rather measured given the widely recognised complexity of bilateral relationships. On the other hand, we believe more focus should be given to domestic policy, data, and earnings impulses which have so far shown resilience against odds.

• We do not believe that Chinese policy makers will dial back the commitment to support domestic demand, as some analysts feared following Geneva. While economic data were largely resilient, there are several reasons why we think sustaining and even expanding policy support are essential to keep rebalancing efforts and equity momentum going. These include extending policy support to non-durables and services consumption, boosting private credit demand and supporting the property sector
• We think the easing of the China-US tariff conditions sets a conducive external backdrop for China equity which shall continue to benefit from the earnings rebound, tech and AI-driven rerating and low valuations. 1Q25 earnings for A-shares showed signs of fundamental bottoming out, versus the lacklustre 2024 annual results. This uptrend is led by materials, IT, consumer discretionary, and communications, in a combination of cyclical and tech-driven improvement. AI penetration and cost control have driven up the bottom line for tech companies. The technology sector remains a key part of our bar-belled China equity strategy, enabled by high dividend paying cash cows in the financials, utilities and consumer space
• Tightness in interbank liquidity persisted into Q2 which has made it difficult for onshore bonds to perform despite rate cuts. Elevated funding cost volatility has led to a rare negative carry problem for investors as short-term bond yields fell below funding costs. This yield inversion amplified bond market corrections and forced investors to passively deleverage. Looking ahead, we expect funding cost conditions to ease as the People's Bank of China (PBoC) resumes reserve requirement ratio (RRR) cuts. Rates could remain choppy as domestic fiscal stimulus intensifies against an unpredictable external demand backdrop. Our onshore bond market call remains mildly cautious, and an active strategy is preferred