Executive summary
The unprecedented stimulus announced through the Chinese government a vital catalyst for the Chinese equity market largely at the time of 2024. Stimulus measures in 2024 included:
In 2024, the KraneShares MSCI All China Index ETF (Ticker: KALL) returned 16.33%, the KraneShares MSCI China A 50 Connect Index ETF (Ticker: KBA) returned 16.06%, and the KraneShares CSI China Internet ETF (Ticker: KWEB) returned 13.25%.1
For KALL, KWEB, and KBA standard performance, risks, and top 10 holdings, please visit kraneshares.com/kall, kraneshares.com/kweb, or kraneshares.com/kba.
Introduction
The Wayne Gretzky ice hockey legend said: “Patino where the album is going and where it was. ” After fifteen years of higher performance, it is understandable that global investors have been aimed only to a class of single assets: US actions. But do they stay too long where the album was?
If the gains of Chinese stocks or the allocations of non-US movements more broadly, constitute where the washing machine is going, the existing positioning does not reflect this. The diversity of assignments from underweight to non-existent, to an excessive “non-investable” bucket. This is despite China’s vital role in the global economy and its importance to the effects of U. S. and global multinationals.
Extreme statements such as “unforgettable,” in the context of soft positioning and low valuations, have traditionally been the hallmarks of an asset class’s track record. However, as the saying goes, “the market can remain irrational for longer than it can remain solvent. “
The truth is that the well-guarded top U. S. moves have Chinese revenues, but little to no beta edition of the negative media story that continues to weigh on Chinese moves and overall investor sentiment toward China.
Several changes in the tone and tenor of government officials caught our attention in the first half of the year. However, it was not until after the People’s Bank of China (PBOC), China’s central bank, finally fired the proverbial fiscal policy “bazooka” on Tuesday, September 24th, that global investors recognized the change in trajectory. Notably, the release from the CPC Central Committee in December used the phrase “moderately loose” to describe monetary policy, refraining from using the word “stable” for the first time since 2011. Reasonably, scar tissue from internet regulation, the zero COVID policy, and geopolitical flare-ups kept many investors skeptical and on the sidelines of the resulting massive rally in China’s equity market.
In this perspective, we will explore the possible trajectory of the economic market and the economic movements of China in 2025, why we believe that the measures of 2024 will not feel until later in 2025, structural reforms that can begin this year and the prospective form of Global reallocation investors.
2024 stimulus: more than a term bouncing
China’s government has ample dry powder after providing minimal stimulus during the pandemic. Even after the pandemic, when economic challenges persisted, China continued this fiscal conservatism.
As such, China’s general public debt remains low in 62% of the Gross Domestic Product (GDP), with the maximum debt from local governments. Stimulus 2024 is just a fall in the cube in terms of China’s indebtedness capacity before reaching one hundred percent of GDP. To put this in perspective, the United States and Japan have 122% and 255% governmental relationships, respectively.
Government Leverage
As such, the PBOC will likely continue its softening cycle by reducing police fees used to set up bank deposits, lending rates, and interbank loans. It is also very likely that the amount of cash that banks will have to hold in reserve than loans will continue to decrease. In theory, this increases lending.
However, as we have observed for a long time, more source of capital does not necessarily create more calls for it. , which has weighed on domestic intake due to a true representation of wealth for a large portion of Spacehold’s average wealth. The policies with which manufacturers want to do much more to revive customer trust and the business. The 2024 stimulus measures were just the beginning, in our view.
Actions in China remain to US obligations
In 2025, China’s policy position is lately the maximum accommodation between primary economies. The 10 -year government bonus yield fell to a minimum of 1. 82% on December 11, 2024.
10-year performance
China’s existing performance at 10 is the fourth decline among the world’s five largest economies. Only Japan is declining, however, the Bank of Japan has to probably have a long-term rate building cycle.
Savings
The mix of a low threat-free rate and top dividend yields allows for an incredibly equity threat premium compared to the U. S. U. S. The capital index of the yield on the 10-year Chinese government bond tends to precede bull inventories in China. This is precisely what happened in September after the threat of equity, the premium of the premium reached the ten-year tops in August. As you can see from the list below, the equity threat premium has a strong inverse correlation with inventory market returns in China.
Track
Meanwhile, the opposite is true in the United States, where the capital threat premium succeeds in the gaps of the decade, and inventory markets succeed at all-time highs.
ERP
Investors in China take note of this and are already assigned to the inventory market, as evidenced through a building in promises on the margin, which are used to make leverage investments or simply negotiate margin accounts.
Margin
2025 You can see the expansion of the subsidies of a success agreement.
On the budget side, foreign investors requested a “blind helicopter money” to revive national intake in China. However, China resolution manufacturers distrusted “sugar” that comes from budgetary expenses and their consequences: large amounts of sticky debt and inflation. However, China spends an abundant amount in a specific way and continues to do so in 2025.
Global investors were disappointed by the follow-up announcement from the National People’s Congress (NPC) after September’s stimulus round, saying that the additional measures were too focused on real estate and local government finances, rather than direct consumer transfers. However, this view misunderstands the great influence these factors have on domestic consumption.
By strengthening the finance of local authorities, Chinese leaders make sure that municipalities can concentrate in advertising situations in their districts, the elevation of public sector contracting and contracts to local businesses. Shortly after the NPC, many local governments have even presented intelligent safe admission activities. This did not take place when those municipalities were involved with land sales revenues.
By raising housing prices, the government is reversing the negative wealth effect from the real estate deleveraging campaign. The collapse in housing prices also weighed on the real economy as the housing construction employment ecosystem contracted.
Policy
Although total retail sales have not yet recovered, we have seen the beginning of a recovery in real estate transaction volume and housing prices, which we believe is likely to continue in 2025.
Accommodation
In July, the tax authorities rolled out a significant package of trade-in subsidies for autos and home appliances. Moreover, the policy has already produced results as the year-over-year growth in purchases of both home appliances and autos far exceeded overall retail sales growth in November.
Retail Sales
What categories could be next? We believe it will likely be the product categories that provide the most downstream employment. Auto and appliance manufacturers are major employers in China. BYD alone employs over half a million people.
Cars
The use of employment has an effect on a criterion, industry subsidies can target target generation and even the food service and food service industries, which have already been the targets of some local voucher programs.
Local services
The Internet: A Key Beneficiary of the Stimulus
Internet companies have become the transmission engines of China’s economy. This means they are likely to benefit from stimulus policies first, especially policies around consumption.
Consequently, Internet corporations have some of the profits of profits among corporations in China.
MSCI China Index
We, that 2025, can see that Chinese markets are more fundamentally promoted, since it has now been shown that the government is committed to support the economy.
In the Chinese internet sector, the return on money flows, redemptions, and dividends have a considerable higher. It’s us that this will likely continue into 2025, making China’s large web rooftops potentially than their American counterparts.
Chinese Internet
This is compounded by the fact that China’s internet firms, despite the run-up in performance in 2024, remain undervalued compared to their US counterparts, trading at nearly one-half of the earnings multiple.
P/E
Could China start meeting demanding structural situations in 2025?
China has an incredibly high savings rate, which means a propensity of decrease to consume. The upper savings rate is the result of an individual’s duty for their own retirement and physical state costs. Another structural thing that weighs on the Chinese economy and the admission point is the Hukou system, which prevents the migrant personnel from public facilities in the cities where they live.
2025 could represent a turning point when China’s government is finished de-risking and deleveraging (Internet Regulation in 20-21 and Real Estate in 23– 24) and embarks on a journey to carry out long-awaited structural reforms to address the issues mentioned above. We believe the government did not have the confidence to do so when these areas, among others, were perceived to be overstretched.
This can lead to innovations in short -term emotions, but represents a long -term development. Thanks to the reforms, that China can assume disorders such as the lowest client’s trust and the demographic decline.
Health Care Reform
After effectively completing an anti -Scratch crusade in the fitness care industry in 2024, founded on official statements, the government can be safe enough to improve the facilities presented through the public fitness system. This would also be the client’s confidence, since the intermediate source of income families and the decrease in families would no longer consider paying personal physical attention.
Hukou System Reform
Under the current system, China’s migrant workers are prohibited from accessing public services such as education and health care in the tier-1 and tier-2 cities in which they are employed until they can establish at least five years of residency in those cities. As a result, many leave families behind in their villages so that their children can attend school. Meanwhile, those in need of medical care must bear the expense of returning to their hometowns, often to receive a lower standard of care than they would have in their cities of employment.
Making it faster and easier for these workers to establish residency and avail themselves of public services where they work would generate a significant boost to consumer confidence, as these workers would no longer have to maintain a high “rainy day fund”, a key driver of China’s high household savings rate. Meanwhile, they would be able to bring their children with them, who can then take advantage of better educational opportunities in tier-1 and tier-2 cities and eventually replace China’s rapidly aging skilled workforce.
Are China’s moves Trump’s best trade?
We believe there are solid reasons to believe that a second Trump Administration will end up being positive for the US-China relationship and China’s equity market. Trump invited Xi Jinping himself to attend his inauguration. Although the leader is unlikely to be physically present at the event, we believe the invitation is symbolic of Trump’s desire to bring Xi to the bargaining table. The Biden Administration, by contrast, kept all of Trump’s tariffs intact, instituted more trade restrictions, and engaged in precious few strategic talks with China to relieve stress on the relationship.
There have been other signs of Trump’s conciliatory, “Art of The Deal” approach to China. These include the removal, at the behest of Trump, Elon Musk, and their loyalists, of outbound China investment restrictions in the Continuing Resolution (CR), passed in December, to keep the government funded into the new year as well as Trump’s stated resolve to reverse the ban on TikTok, the popular social media platform owned by the China-based technology company Bytedance. In our opinion, Trump’s election was the best possible outcome for the US-China relationship at the current juncture.
The tariff threats of President -elect Trump have prevented many investors from being assigned to China’s actions despite convincing valuations and obtain a better political environment. However, the tariff lens deserves not to be implemented in China in a vacuum, since even Mexico and Canada were beaten with threats similar rates. In addition, exports to the United States now constitute only 14% of China’s general exports, below 21% in 2006. As such, even assuming that some more price lists are put, the perspective has an effect on the China economy in general is more. Probably to be limited.
China exports
The Chinese industry with a wider Asia has significantly higher as Chinese corporations have moved away from the United States, as US corporations claim they are going against China.
We that Trump is uniquely placed to have a “Nixon will go to China” moment, final, a big deal that replicates his phase one industry deal since 2020 through an unconventional technique to diplomacy. view.
The United States wants China to want China to want the United States and costs to have an ineffective and even economically harmful history. According to the HOOver administration in accordance with the 1929 inventory market accident and the beginning of the Great Depression, the Smoot-Hawley cost law was adopted, which higher costs in more than 20,000 goods enter 20% or more than The United States. Many economic historians characterize the act of making the wonderful depression bigger through the maintenance of the best costs of the client. As a business person, Trump knows that costs deserve not to be a long -standing policy, they deserve to be a negotiation tool. This point of view is seen in the upper part through the resolution of the Trump’s first administration to reduce the established costs by reaching the “on -ON” industry agreement in 2020.
Will leverage be applied to get a great deal for the American people? 100%, but President Trump is very aware of the US stock market and the US economy’s strong position.
Conclusion
China’s inventory markets are expected to continue the upward trend that began in 2024 on new stimulus, the release of policies already in place, and the prospect of ill-needed structural reforms. Web corporations can continue to outperform.
Although the political error is a risk, we remain convinced that the Chinese government will continue due to the trail of fiscal and financial policy accommodated in 2025 and that Trump’s management will seek a “great matter” with China, although through a difficult negotiation .
Definitions
Dividend yield: Dividend yield is a monetary ratio that shows how much a company will pay in dividends relative to its inventory price.
Managed through stock (EPS): that of a corporation divided by its total outstanding movements.
Gross Domestic Product (GDP): The total value of all goods and services produced within a country over a specific period of time, in this case one year.
Housing value index (one hundred cities): This index follows homes in one hundred Chinese cities from point 1, point 2 and point 3 and is calculated and maintained through the National Office of Chinese Statistics (NBS).
Metric shareholders: metric to track how a company returns to shareholders.
Repurchase performance: The sum of all the percentage repurchase systems announced divided through the capitalization of the market of a corporation.
Market capitalization: the general of all the shares issued by a company.
Price-to-Earnings (P/E) Ratio: A measure of how cheap a company’s stock is relative to its earnings. It is calculated by dividing a company’s price per share by a company’s earnings per share (EPS).
MSCI China All Shares Index: The MSCI China All Shares Index captures large and mid-cap representation across China A‐shares, B‐shares, H‐shares, Red‐chips, P‐ chips and foreign listings (e.g. ADRs). The index aims to reflect the opportunity set of China share classes listed in Hong Kong, Shanghai, Shenzhen and outside of China. It is based on the concept of the integrated MSCI China equity universe with China A-shares included. The index was launched on June 26, 2014.
S-Index
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