Executive Summary

The unprecedented stimulus announced by China’s government was a significant catalyst for China’s equity market broadly in the second half 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 ETF (Ticker: KWEB) returned 13. 25%. 1

For the popular performance of Kall, Kweb and Kba, the dangers and the 10 most productive titles, please Kraneshares. com/kall, Kraneshares. com/kweb or Kraneshares. com/kba.

Introduction

Wayne Gretzky’s ice hockey legend said: “Patino where the washing machine is going and not 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 washing machine was?

If China equity allocations or non-US equity allocations more broadly, represent where the puck is going, current positioning does not reflect that. Allocations range from underweight to non-existent, to the extreme “un-investable” bucket. This is despite China’s significant role in the global economy and its importance to the bottom lines of both US and global multinationals.

Extreme statements as “unforgettable”, in the context of the positioning of soft and low evaluations, have traditionally been the signs of the back of a class of assets. However, he says that he says: “The market can remain irrational for longer than it can remain solvent. “

The reality is that the most widely held US stocks have significant China revenue, but little to no beta to the negative media narrative that continues to weigh on China equities and general investor sentiment toward China.

Several adjustments in tone and tenor of government representatives drew our attention to the first half. However, it was only after China’s Populaire Banker (PBOC), the Chinese Central Bank, despite the proverbial “Bazooka” fiscal policy being scrapped on Tuesday, September 24, that global investors identified the replacement of the trajectory. In particular, the CPC Central Committee’s December publication used the term “moderately weak” to describe financial policy, refraining from using the word “stable” for the first time since 2011. Elevating the scar tissue of internet regulations, 0 Covid politics and geopolitical pushes have kept many investors skeptical and on the sidelines of the large demonstration that resulted in the Chinese equity market.

In these perspectives, we will explore the possible trajectory of the Chinese economic and inventory market in 2025, the reasons why we believe that 2024 measures will not be felt before the end of 2025, the structural reforms that can begin this year and the prospective trajectory of global investors to Reallow.

2024 Stimulus: that a short -term bounce

The Chinese government has a giant dry powder after offering minimal stimulus from the pandemic. Even after the pandemic, when demanding economic situations persisted, China continued this fiscal conservatism.

As such, China’s overall public debt remains low at 62% of gross domestic product (GDP), the maximum of local government debt. The 2024 stimulus is just a fall in the bucket in terms of China’s borrowing capacity before achieving 100 percent of GDP. To put this in perspective, the United States and Japan have debt-to-government GDP ratios of 122% and 255%, 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 long observed, more supply of capital does not necessarily create more demand for it. China’s credit growth has remained sluggish throughout the recent rate cut cycle. China’s economic headwinds have been driven by lower housing prices and the resulting negative wealth effect, which has weighed on domestic consumption due to real estate accounting for an outsized portion of the average household’s wealth. Policymakers, therefore, need to do far more to revive consumer and business confidence. The 2024 stimulus measures were just the beginning, in our view.

China Equities Remain Attractive Over Bonds, US Equities

Going into 2025, China’s monetary policy stance is currently the most accommodative among the major economies. The yield on the 10-year government bond dropped to an all-time low of 1.82% on December 11th, 2024.

10 -year performance

China’s current 10-year yield is the fourth lowest among the five largest economies globally. Only Japan’s is lower, but the Bank of Japan has begun what is likely a long-term rate hike cycle.

Savings

The mix of a low no-threat rate and top dividend yields allows for an incredibly threat of justice bonus compared to the United States. Spikes in the equity threat premium, measured through the ratio of average dividend yield within the MSCI China Stock Index and going back to the Chinese government’s 10-year tie, tend to precede bull movements in China. This is precisely what happened in September after the threat of justice premium reached ten years of heights in August. As you can see from the chart below, the justice threat premium has a strong opposite correlation with inventory market returns in China.

Clue

Meanwhile, the opposite is true in the US, where the equity premium is to the minimums of the decade, and inventory markets are at the maximum of all time.

ERP

Investors in China take note of this and are already assigned to the inventory market, as evidenced through a margin guarantee jump, used to make leverage investments or negotiate margin accounts.

Margin

2025 Could See The Expansion of Highly Successful Trade-In Subsidies

On the fiscal side, foreign investors have called for indiscriminate “helicopter money” to jumpstart domestic consumption in China. However, China’s policymakers are wary of the “sugar high” that comes from fiscal spending and its aftermath: massive amounts of debt and sticky inflation. Nonetheless, China is spending a considerable amount in a targeted manner and is likely to continue to do so in 2025.

Global investors were disappointed through the announcement of monitoring the National People (NPJ) after the September stimulus round, saying that additional measures were too aimed at local genuine finances and government finances, that direct transfers of customers. However, this point of view ignores the wonderful influence of these points in domestic consumption.

By strengthening the finances of local authorities, Chinese leaders ensure that municipalities can focus on advertising situations in their districts, raising public sector procurement, and contracts to local enterprises. Soon after the NPC, many local governments have even introduced smart safe intake activities. This did not take place when those municipalities were involved with the income from land sales.

By expanding housing, the government reverses the negative wealth effect of the genuine asset deterioration campaign. The housing cave has also weighed in on genuine economics as the housing structure employment ecosystem has contracted.

Policy

While overall retail sales have yet to recover, we have noted that a resumption of genuine real estate transaction volume and home prices has begun, which we believe will continue into 2025.

Accommodation

In July, the Fiscal Government deployed a set of subsidies of the car for cars and appliances. In addition, the policy has already produced results, because the expansion of one year to the other of the purchases of appliances and cars has exceeded the general expansion in retail trade in November.

Retail sales

What categories can be following? We will probably be the categories of products that will offer the maximum work downstream. Automobile brands and appliances are main employers in China. Byd only uses more than one part of one million people.

Cars

Using employment impact as a yardstick, trade-in subsidies may soon target technology and even the restaurant and food service industries, which have already been the targets of some local voucher programs.

Local services

Internet: A Key Beneficiary of Stimulus

Internet corporations have the engines of transmission of the Chinese economy. This means that they should probably take advantage of recovery policies, in specific admission policies.

As a result, corporations have some of the expectations of greater gain 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.

China Internet

This is upset through the fact that Chinese Internet companies, despite the era of functionality in 2024, remain undervalued compared to their American counterparts, negotiating almost part of the profits.

P / e

Could China start addressing 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 may constitute a turning point where the Chinese government is finished to disintegrate and degrade (Internet regulation in 20-21 and genuine goods in 23 to 24) and embarks on a vacation to make so long-awaited structural reforms to resolve the disorders discussed On the story that the government did not have the confidence to do so when those areas, among others, were perceived as too extensive.

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 reform

Having successfully completed an antigraft campaign in the healthcare industry in 2024, based on official statements, the government may now be finally confident enough to improve the services offered by the public healthcare system. This would also boost consumer confidence, as middle-income and lower households would no longer find it necessary to pay for private health care.

Reform of the hukou system

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 that staff more temporary and less difficult to identify the apartment and take credit for public facilities where the paintings would generate a significant spice for client trust, because those staff will no longer have a “rain fund,” a key to the family. Meanwhile, they could bring their young people with them, who can then take the credit for greater educational opportunities in the cities of point 1 and point 2 and, in all likelihood, upgrade China’s professional paints.

Are China Stocks The Ultimate Trump 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 symptoms of Trump’s conciliation, China’s “arthouse of dealing” approach. These come with the removal, at the behest of Trump, Elon Musk and their loyalists, of outgoing Chinese investment restrictions in the continuing resolution (CR), passed, in December, to keep the government funded in the New Year, as well as Trump’s stated solution to oppose the ban on Tiktok, the popular social media platform owned by China-based tech corporate Bytedance. In our view, Trump’s election was the most productive final results imaginable for the U. S. -China rendezvous at the premiere.

President-elect Trump’s tariff threats have prevented many investors from attributing Chinese stocks despite convincing valuations and gaining a better political environment. However, the tariff target deserves not to be implemented to China in a vacuum, as even Mexico and Canada have hit each other through similar tariff threats. In addition, exports to the United States now account for only 14% of China’s overall exports, compared to 21% in 2006. As such, even assuming some additional price lists are established, the outlook has an effect on the Chinese economy as a whole is likely 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 who Trump is located exclusively to have a moment “Nixon will go to China”, final, a big problem that replicates its agreement of the phase one industry since 2020 through an unconventional technique to diplomacy. view.

The United States wishes that China wishes that China wishes the United States and costs to have a history in an inefficient and even economically damaging way. According to the Hoover administration in keeping with the inventory market crash of 1929 and the onset of the Great Depression, the Smoot-Hawley Cost Act was adopted, which higher costs on more than 20,000 goods enter 20% or more of the United States. Many economic historians characterize the act of making the wonderful depression bigger through the maintenance of the customer’s best costs. As a business person, Trump knows that costs deserve not to be a long-standing policy, they deserve to be a negotiating tool. This view is seen at the top through the first Trump administration’s resolve to halve the costs set by reaching the “Phase ON” industry deal 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 ascending trend that began in 2024 on the new stimulus, the release of policies already implemented, and the perspective initiated from poorly necessary structural reforms. Web corporations can continue to exceed.

While policy error is always a risk, we remain confident that China’s government will continue down the path of accommodative fiscal and monetary policy in 2025 and that the Trump Administration will seek a “grand bargain” with China, albeit through some tough 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 the action (BPA): that of a corporate divided through its total movements in circulation.

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 cost index (one hundred cities): This index follows housing costs in one hundred giant Chinese cities of point 1, 2 and 3 and is calculated and remained updated through the National Statistics Office (End) in China.

Metric shareholders: metric to track how a company returns to shareholders.

Buyback Yield: The sum of the value of all announced share repurchase programs divided by the market capitalization of a corporation.

Market capitalization: the general of all movements issued through a company.

Price Advantage/GET Ratio (P/E): A measure of how reasonable a company’s moves relate to its advantages. It is calculated by dividing the value through a company’s share by the advantage through the share through a company (EPS).

MSCI China Stock Index: The MSCI China All Shares Index reflects the representation of giant and midsize capitalizations between A movements, B shares, H shares, red chips, P chips, and foreign citations (e. g. , ADRs). The index aims to reflect all opportunities from the Chinese stock categories indexed in Hong Kong, Shanghai, Shenzhen and Out Out Doors China. It is based on the concept of the built-in universe of MSCI China movements with a Chinese movements. The indication presented on June 26, 2014.

S&P 500 index: The S&P 500 index is partly giant that it is believed to be the most productive meter of US movements with giant capitalization. There are more than 9. 9 billions of indexed dollars or compared to the index, with indexed assets that comprise approximately 3. 4 USD one billion of this total. The index includes 500 leading corporations and covers about 80% of the capitalization of the available market. The index introduced on March 4, 1957.

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