Chinese Stocks Head for First Yearly Advance Since Pandemic

Chinese stocks are poised for their first annual gain since the onset of the COVID-19 pandemic, driven by a combination of policy support, earnings growth, and a recovery in consumer demand and the real estate sector. The rally, which began in late September 2023, has been fueled by a series of policy announcements aimed at boosting the economy and the stock market.



The Chinese government's policy initiatives, such as fiscal stimulus and equity market support, have contributed significantly to the rally in Chinese stocks. Every RMB 1 trillion of fiscal stimulus that goes to the real economy should lift China's real GDP growth by 40 basis points, which in turn would add 2 percentage points to the earnings growth of stocks in China's main indexes, the MSCI China and the CSI300. Additionally, the government's determination to support the stock market has boosted investor confidence, with analysts raising their price-to-earnings targets for MSCI China companies to 12.0x earnings and CSI300 stocks to 14.2x earnings.

Earnings growth, particularly in sectors like technology and healthcare, is expected to play a significant role in sustaining the rally in Chinese stocks. The technology sector, which has been a significant driver of growth in the Chinese economy, is expected to continue its strong performance, supported by the government's focus on innovation and technological advancement. The healthcare sector is also poised to benefit from increased demand for medical services and products, as well as government initiatives aimed at improving healthcare infrastructure and access.



The recovery in consumer demand and the real estate sector is expected to have a positive impact on the performance of Chinese stocks in the coming year. The Chinese economy is expected to gain momentum in the fourth quarter of 2023, building on the faster-than-expected expansion witnessed in the third quarter. This is due to a positive development in the unemployment rate, which decreased from 5.2% in the previous month to 5% in September 2023. As consumers gain confidence, they are expected to increase spending on goods and services such as catering, clothing, cosmetics, and jewelry. This "revenge spending" is expected to continue over the coming quarters as some of the excess savings accumulated over the pandemic are spent, leading to a V-shaped recovery in retail sales. This increased consumer demand will likely boost the earnings of companies in the consumer sector, positively impacting their stock performance.



In conclusion, the rally in Chinese stocks is supported by a combination of policy initiatives, earnings growth, and a recovery in consumer demand and the real estate sector. The government's determination to support the stock market, coupled with the potential for earnings growth in key sectors, suggests that the rally is likely to continue in the coming year. However, investors should remain vigilant and monitor the evolving situation, as market dynamics can change rapidly.