Cautious gains for China equities

[WORLD] China’s stock markets are seeing renewed interest as global investors start shifting away from U.S. assets amid political and economic uncertainties. According to strategists at Natixis Investment Managers, Chinese equities have benefited in recent months from this reallocation, partly due to earlier policy support measures from the People’s Bank of China (PBOC), especially for the troubled property sector.

Despite the positive momentum, the outlook for the second half of 2025 remains murky. Structural challenges in the Chinese economy—like slowing growth, deflationary risks, and limited consumer demand—are weighing on investor confidence. Additionally, market watchers are growing wary of Beijing’s relatively restrained fiscal and monetary policy approach in the face of these headwinds.

Natixis maintains a cautiously optimistic stance on Chinese equities. While they don’t foresee a global recession this year, they emphasize that market resilience will depend on stronger policy signaling from Beijing and clearer signs of economic stabilization on the domestic front.

Implications for Investors and Policymakers

Reallocation Trends Could Support Emerging Markets

A shift away from U.S. assets—prompted by concerns over high valuations and political gridlock—could sustain capital flows into Chinese and broader Asian equities. This rotation presents an opportunity for regional markets, especially if central banks in Asia continue to act preemptively to stabilize growth.

Beijing’s Cautious Policy May Be a Double-Edged Sword

The PBOC’s earlier interventions provided some relief, particularly in real estate. However, Beijing’s reluctance to launch large-scale stimulus raises questions about its commitment to reviving domestic demand. This conservative stance might prevent overheating but could also delay broader economic recovery.

Global Outlook Buoys Sentiment but Masks Local Risks

Even as the global recession risk remains low, China's internal fragilities—especially persistent deflation and weak household spending—could limit upside in its equity markets. For foreign investors, that means navigating a fine line between global optimism and domestic caution.

What We Think

China’s equity market is benefiting from a global portfolio shift, but the underlying story is far more complex. While short-term capital inflows offer support, long-term confidence hinges on addressing deeper structural challenges. "The market reacted positively to the [PBOC’s] earlier measures," as Natixis noted, but that goodwill may fade without more decisive action. The government’s muted response to deflation and property sector woes could undercut broader market resilience.

To maintain investor interest, Beijing may need to rethink its policy orthodoxy—prioritizing targeted stimulus and structural reforms over symbolic gestures. For now, China remains a cautiously promising bet, not a runaway growth story. Investors should stay alert for clearer policy cues and tangible signs of economic rebalancing.