Chinese Equities: Betting on Trade De-Escalation and Value

The Shanghai Composite Index, hovering near 3,385 as of June 2025, sits at a critical crossroads. After hitting a five-year low of 2,718.63 in September 2024 amid U.S.-China trade tensions, the index has rebounded modestly but remains deeply undervalued relative to its 2007 peak of 6,124.04. With trade negotiations showing flickers of progress and Beijing's monetary stimulus efforts gaining traction, now may be the moment to position for a potential turnaround. Here's why investors should consider Chinese equities—and where to look for the best risk-reward opportunities.

Valuations: A Foundation of Opportunity

The Shanghai Composite's current level of ~3,385 represents a valuation discount of nearly 46% from its 2007 peak. Even compared to its 2024 lows, the index trades at a forward P/E ratio of 11.2x, well below its 10-year average of 14.5x. This compression is particularly acute in export-linked sectors, where price-to-book ratios are at decade lows.

The undervaluation isn't confined to broad market indices. Key sectors like technology and industrial materials—critical to China's growth narrative—also offer compelling multiples. For example, rare earth miners such as Ganzhou Rare Earth (SH:600769) trade at ~5x EV/EBITDA, while semiconductor equipment makers like Eoptolink Technology (SH:688687) operate at P/S ratios of 2.5x, down from 6x in 2022.

Macro Catalysts: Trade Talks and Monetary Policy

The turning point for Chinese equities hinges on the U.S.-China trade relationship. Recent signals—such as China's consideration of waiving a 125% tariff on U.S. goods and U.S. President Trump's comments on “ongoing discussions”—suggest a potential thaw. Even a partial resolution could unlock $200B+ in pent-up demand for Chinese exporters, particularly in tech hardware and consumer discretionary sectors.

Meanwhile, Beijing's monetary stance remains accommodative. The People's Bank of China's “appropriately loose” policy, including targeted cuts to reserve requirements and credit support for small businesses, has bolstered liquidity. The M2 money supply growth rate, at 9.5% year-on-year in early 2025, signals continued support for the real economy—a tailwind for equity markets.

Sector-Specific Plays: Tech and Hard Assets Lead the Way

The best opportunities lie in sectors most leveraged to trade de-escalation and domestic stimulus:

1. Export-Linked Tech:
2. Semiconductors and Components: Companies like SMIC (NYSE:SMICY) and Hua Hong Semiconductor (SH:600460) benefit from reduced trade barriers and rising global demand for chips. Their valuations are deeply discounted despite China's push to achieve self-sufficiency in advanced manufacturing.

3. Consumer Electronics: Brands such as TCL (OTC:TCLSY) and Xiaomi (HKEX:1810) could see a rebound in U.S. sales if tariffs are reduced.

4. Rare Earth and Industrial Metals:

5. Strategic Resources: China dominates global production of rare earth elements (REEs), which are critical for EV batteries and defense tech. Firms like Baotou Rare Earth (SH:600111) and Minmetals Resources (HKEX:1378) offer exposure to a sector with zero substitutes in the short term. The U.S.-China Minerals Security Act of 2024, which seeks to diversify supply chains, could paradoxically boost demand for Chinese expertise.

6. Steel and Aluminum: Companies such as Chalco (SH:601288) and Hebei Iron & Steel (HKEX:600019) are undervalued and poised to benefit from infrastructure spending in China and Southeast Asia.

7. Financials:

8. Banks and Insurance: Firms like Ping An Insurance (HKEX:2318) and ICBC (NYSE:IDCBF) trade at 0.8x P/B, near cyclical lows. A pickup in corporate lending and household consumption—driven by improved trade sentiment—could re-rate these stocks.

Risk-Adjusted Strategy: Buy the Dip

While risks remain—including a potential breakdown in trade talks and lingering geopolitical friction—the asymmetric risk-reward favors gradual accumulation. Here's how to approach it:

• Target Entry Points: Use dips below 3,300 in the Shanghai Composite as buying opportunities. The index's 200-day moving average (currently at 3,214) acts as a support level, with forecasts suggesting it could hold even in a worst-case scenario.
  
  Historically, this strategy has proven effective: from 2020–2025, such a buy-the-dip approach generated a 42.5% return, outperforming the benchmark's 25.11% gain. The strategy's 17.39% excess return and 10.96% CAGR underscore its resilience, even amid a 37.22% maximum drawdown, which highlights the need for disciplined risk management. Pairing this with hedging tools like puts on the iShares MSCI China ETF (MCHI) can mitigate volatility while capturing upside.

• Sector Rotation: Rotate into export-linked tech and hard assets as trade optimism builds. Avoid overexposure to real estate and state-owned enterprises, which face structural headwinds.

• Hedging: Pair long positions with puts on the iShares MSCI China ETF (MCHI) to mitigate downside risk.

Conclusion

Chinese equities are pricing in a worst-case scenario for trade tensions. If negotiations proceed constructively, even a modest de-escalation could spark a sharp rebound in sectors like tech and industrials. With valuations at multi-year lows and macro tailwinds emerging, now is the time to position for a cyclical recovery. As the old adage goes: “Buy when there's blood on the streets.”

Investment Grade: BBB (Moderate Risk)
Horizon: 6–12 months
Focus Sectors: Tech hardware, rare earth/mining, and financials.
Avoid: Real estate and heavily leveraged state-owned enterprises.

The next chapter of U.S.-China relations will be written in trade deals, not tariffs. For investors, this is the moment to bet on value—and prepare for a potential comeback.