The recent de-escalation of the US-China trade war has provided some relief to global markets, but Chinese equities remain characterised by caution and subdued optimism. The Hang Seng China Enterprises Index, which tracks major mainland stocks listed in Hong Kong, has rebounded nearly 17% from its April lows and posted a fifth consecutive week of gains. However, it still trades about 8% below its March peak, reflecting persistent investor scepticism.
While the cost of hedging against declines has normalised, the mood among investors is noticeably restrained compared to previous stimulus-driven rallies. This lack of euphoria is underpinned by several factors, including disappointing earnings from tech giants, which have tempered hopes that advancements in artificial intelligence and technology would reignite the sector’s momentum.
Despite some tariff reductions by the US, lingering trade barriers continue to challenge China’s key export sectors. The Shanghai Composite Index, for instance, recently marked its second consecutive session of losses, with notable declines in financial, energy, and technology shares. Over the past month, the broader China Stock Market Index has lost ground, though it remains up over the past year.
Investor demand for upside exposure in Chinese equities remains muted, even as US-China trade talks show progress. The options market now reflects a more balanced outlook, with traders shifting from aggressive buying to net selling of options, signalling caution about further gains.
Geopolitical uncertainty also weighs heavily on sentiment. The prospect of continued US tariffs, especially under a potential second Trump administration, keeps investors wary of betting on a sustained Chinese market rally. Unpredictability in US policy is prompting investors to temper their bullishness, anticipating more volatility as geopolitical tensions evolve.
Looking ahead, there are some reasons for optimism. Chinese stocks are trading at significant discounts relative to US and Indian equities, with average price-to-earnings ratios around 11–15x compared to much higher levels in India and the US. This valuation gap, combined with ongoing government stimulus-including broad rate cuts, stock market stabilisation funds, and relief for local governments-could attract foreign capital back to China in 2025. Some believe these measures may help China’s equity market continue its upward trend from 2024, especially if further stimulus surprises materialise.
Still, the recovery is fragile. Investors are closely monitoring upcoming Chinese economic data, such as retail sales and industrial production, for further signs of resilience or weakness. While the easing of trade tensions is a positive step, more concrete actions are needed to fully restore confidence and catalyse a new phase of market leadership for Chinese and US companies alike.
