The economy stayed steady, and Chinese equities rebounded in the month of May, mainly led by cyclicals as market expects a slowdown in market liquidity tightening. CSI 300 index gained 4.06% (5.77% in US$ terms), the Shanghai Composite was 4.89% higher (6.62% in US$ terms), while the Hong Kong Hang Seng Index was weaker, only gaining 1.49% (1.56% in US$ terms).
Fundamentally, economic indicators, including various PMIs and other concurrent indicators, mostly remain in the positive zone, but we also do note that the numbers have actually been trending down in the recent months, which is likely a result of the low base effect wearing off. Overall, the Chinese economy is still doing decent, despite the recent slowing down. With the corporate earnings on the rise, picking high quality assets with robust earnings and lower valuation volatility should be the priority.
The more important issue in the Chinese market lies on the policy direction. As the Chinese equity market hit recent highs early on in the year, authorities emphasised the importance of stability, reducing liquidity to clampdown on excessive speculation, China’s money supply M2 has since then returned to pre-pandemic levels. Historically, during periods of slower money supply growth in relative to GDP, stock performance tends to be weaker, as the tight liquidity in the market limits the valuation levels in the market. With the current money supply staying tight, expect valuation expansion to be limited in the short to medium term. That said, while the monetary base is a limiting factor, with the economy steady and corporate earnings recovering, we maintain our neutral outlook on the Chinese equity market.
