Recently, the Chinese stock market has rebounded strongly, how does Goldman Sachs view this?

Goldman Sachs continues to be bullish on the Chinese stock market!

The Chinese stock market achieved its best weekly return since December 2022 last week, with the MSCI China Index rising by 8% in a week, led by technology stocks (up 13%). Offshore Chinese stocks have rebounded by 19% since the end of January, outperforming developed and emerging market benchmarks.

A-shares have seen relatively modest gains in the past month, but still outperform Hong Kong stocks year-to-date with a return of 4.5%.

In a report released on Monday, a team led by Goldman Sachs analyst Kinger Lau pointed out that with supportive policies being introduced, under the most optimistic assumptions, if the Chinese stock market can match global leading levels in shareholder returns, corporate governance standards, and the proportion of long-term investor holdings, its valuation could increase by as much as 40%. Even under less optimistic assumptions, with these indicators only improving to the global average level, there is still a 20% upside potential in its valuation.

Goldman Sachs predicts that the earnings per share (EPS) of MSCI China and CSI 300 will reach 8% and 9% respectively in 2024, and rise to 10% and 11% in 2025.

Policy Support for Capital Market Development

Goldman Sachs believes that the recent rebound is mainly due to macroeconomic data in the first quarter exceeding expectations, steady corporate performance in the fourth quarter of 2023, and importantly, the continuous introduction of new policies supporting the capital market.

The Goldman Sachs report mentioned two policy documents:

The State Council recently issued the "Opinions on Strengthening Regulation, Preventing Risks, and Promoting the High-Quality Development of the Capital Market." The opinions consist of 9 parts and are the third "Guo Jiu Tiao" for the capital market. Goldman Sachs stated that the new "Guo Jiu Tiao" will guide the stable development of China's capital market in the coming years.

Subsequently, the China Securities Regulatory Commission issued 5 measures for cooperation in the capital market with Hong Kong: expanding the scope of eligible stock ETF products under Shanghai-Hong Kong Stock Connect; including REITs in Shanghai-Hong Kong Stock Connect; supporting RMB stock trading counters to be included in Hong Kong Stock Connect; optimizing mutual recognition arrangements for funds; supporting leading mainland industry companies to list in Hong Kong.

Goldman Sachs believes that supporting mainland companies to list in Hong Kong, against the backdrop of the lowest number of IPOs and funds raised in six and twenty years respectively, high-quality IPOs will at least help improve the supply side of the IPO market Goldman Sachs: Chinese Stocks Still Cheap!

Goldman Sachs also pointed out that from a historical perspective, the valuation of Chinese stocks is still relatively low. The trading price-to-earnings ratios of MSCI China and CSI 300 Index are 9.6 times and 11.4 times respectively, still below the long-term average by 1 standard deviation. This will provide support for the Chinese stock market.

The significant valuation discount of Chinese stocks compared to global stocks has begun to show its recent resilience, especially when global stock markets are dealing with unfavorable growth and Federal Reserve policy combinations, highlighting the diversification advantages for international investors to continue participating in the Chinese market.

In recent weeks, both unrestricted funds and mutual funds have seen moderate improvements in fund inflows, but investors' positions (whether nominal or relative to benchmarks) overall remain relatively conservative.

This indicates that if the positive momentum continues, it may attract more attention and participation from investors who do not want to miss out on potential market returns, which could further drive market gains. Goldman Sachs pointed out that the record high inflow of northbound funds last Friday to some extent implies this.

Goldman Sachs noted that investors have a strong interest in cash returns, with dividends and stock buybacks being frequently discussed topics in recent client interactions.

We believe that clear policy initiatives (aimed at enhancing shareholder returns), the widening spread between dividends and local risk-free rates, a lower dividend payout ratio, high cash-to-market value ratios, and a declining corporate reinvestment rate will continue to support the rise of the Chinese stock market.

Goldman Sachs stated that the sustainability of the Chinese stock market recovery will depend on several factors, including second-quarter economic growth, first-quarter listed company profits, the implementation of new policies, U.S. economic growth and inflation trends, as well as Federal Reserve monetary policy, and more. Goldman Sachs emphasized that the sensitivity of the Chinese stock market to Federal Reserve monetary policy is decreasing.