Global Markets Strategy 31 August 2025 This material is neither intended to be distributed to Mainland China investors nor to provide securities investment consultancy services within the territory of Mainland China. This material or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. China/Hong Kong Equity Strategy Dashboard Wendy Liu AC (852) 2800 1087 wendy.m.liu@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited/J.P. Morgan Broking (Hong Kon ...

Accessible version China: An Equity Strategist's Diary (H/A) Weekly wrap (25-29 Aug): Juggling with liquidity driven rally and fundamentals Equity Strategy Weekly index performance, Wax & Wane (W&W) indicator HSCEI -1.5%/CSI 300 +2.7%: Offshore markets pulled back a bit from the recent rally after Sinolink Securities raised its margin deposit ratio on new client financing contracts for some securities to 100%, while some domestic mutual funds imposed daily purchase restrictions on some portfolios. Banks rep ...

Market Performance - Wall Street experienced a mixed performance last week, with a slump in the middle driven by fears of an AI bubble and doubts over AI investments' substitutability, followed by a strong finish due to Federal Reserve Chair Jerome Powell's hints at a possible September rate cut [1][2] - On August 22, 2025, Wall Street rallied sharply after Powell suggested interest rates could be lowered soon, indicating a shift in the economic outlook that may warrant a change in monetary policy [2][3] - Traders' expectations for a September rate cut rose significantly, with the probability increasing to 91.5% by Friday afternoon, compared to 70% earlier that day and 85% a week prior, leading to a drop in treasury yields and a rise in stock prices [4] Index Performance - The Dow Jones Industrial Average increased by 1.9% to a record high on August 22, 2025, while the S&P 500 rose by 1.5% and the Nasdaq Composite gained 1.9%. Overall, the S&P 500 gained 0.3% last week, the Dow Jones added over 1.5%, and the Nasdaq lost 0.6% [5] ETF Highlights - KraneShares SSE Star Market 50 Index ETF (KSTR) rose by 12.8% last week, focusing on the 50 largest companies on the SSE Science and Technology Innovation Board [7] - AdvisorShares Pure Cannabis ETF (YOLO) increased by 12.5%, benefiting from potential reclassification of marijuana by President Trump [8] - ARK 21Shares Active Ethereum Futures Strategy ETF (ARKZ) gained 11.3%, with Ethereum leading digital asset gains [9] - Global X MSCI China Consumer Discretionary ETF (CHIQ) rose by 6.4%, driven by steady performance in Chinese e-commerce stocks and significant gains in auto stocks like NIO, which surged by 29% [10] - VanEck ChiNext ETF (CNXT) increased by 5.1%, attracting attention due to a sustained recovery in Chinese stocks and capital inflows [12]

Summary of Key Points from the Conference Call Industry Overview - The focus is on the **Chinese economy**, particularly the impact of the **anti-involution campaign** on economic recovery and deflation issues stemming from the **property sector collapse** and overcapacity in the **green sector** [1][2][3][4]. Core Insights and Arguments - **Deflation and Economic Recovery**: China's economic recovery post-pandemic has been weak, characterized by deflation, primarily due to the collapse of the property sector, which accounted for **25% of GDP** and **38% of national fiscal revenue** [1][14]. - **Anti-Involution Campaign**: Launched in mid-2024, aimed at curbing aggressive price competition among enterprises. Recent actions include increased enforcement and price coordination meetings, leading to rising commodity prices and stock prices for certain companies [2][7]. - **Concerns Over Overcapacity**: Despite the anti-involution efforts, overcapacity in the green sector remains a significant concern. The campaign may not effectively reflate the economy due to anticipated demand shocks and lack of substantial stimulus programs [3][4][33]. - **Price Trends**: Recent spikes in commodity prices are viewed as speculative and unsustainable. PPI inflation remains negative, with forecasts of **-2.5%** for 2025 and **-0.6%** for 2026 [4][10]. - **Sector-Specific Impacts**: The solar industry has been particularly affected by price competition, with many producers incurring losses. Investment growth in the solar sector contracted by **29.1%** in 2024 [9][29]. Additional Important Insights - **Investment Trends**: Local governments have heavily invested in manufacturing sectors, particularly in EVs, batteries, and solar, leading to excessive capacity and price wars. Investment growth in lithium-ion batteries dropped from **104.6%** in 2021 to **19.1%** in 2023 [29][44]. - **Property Market Decline**: The property market continues to struggle, with contract sales of top developers dropping by **73.1%** in value from H1 2021 to H1 2025. Average home prices have fallen by around **30%** [20][47]. - **Export Challenges**: Despite a temporary rebound in exports, significant headwinds are expected due to US tariffs and a slowdown in demand. Exports to the US fell by **21.6%** y-o-y in July [54][61]. - **Social Security Enforcement**: Stricter enforcement of social security contributions is anticipated to challenge SMEs, particularly in labor-intensive sectors, potentially leading to closures or workforce reductions [55][57]. Conclusion - The anti-involution campaign, while aimed at addressing deflation and overcapacity, faces significant challenges. The lack of robust demand-side stimulus, ongoing property market issues, and potential demand shocks could hinder effective economic recovery in China [3][33][67].

Group 1: Core Themes - The report identifies "Tariff War 2.0" as the largest external risk for China in 2025, with cumulative tariff increases peaking at 145% across various sectors including steel, aluminum, and automobiles [1][14][15] - A policy shift since September 2024 is highlighted, focusing on a "three-arrow" approach that emphasizes structural rebalancing, fiscal stimulus, and monetary easing, although the effectiveness of these measures remains limited [1][13][14] - The report discusses the need for innovation and transformation within the Chinese economy, emphasizing the importance of boosting domestic demand, particularly in the service sector [1][13][14] Group 2: Macroeconomic Conditions - GDP growth in the first two quarters of 2025 exceeded targets, but real estate investment remains a significant drag on overall economic performance [2] - Retail sales and consumption are showing signs of divergence, while exports have demonstrated unexpected resilience [2] - Inflationary pressures are present, with deflation risks also being noted, alongside various fiscal and monetary policy measures being implemented [2] Group 3: Long-term Trends - The report outlines a transition from high-speed growth to high-quality growth, indicating a shift in economic focus [2] - It addresses the implications of US-China relations and the potential relocation of global supply chains, as well as the risks associated with China's "Japanification" [2] - An overview of the financial market and the internationalization of the Renminbi (RMB) is provided, reflecting on the broader economic landscape [2]

Summary of Key Points from the Equity Research Report Industry Overview - The report discusses the potential for a new round of supply-side structural reforms in China, referred to as Supply-Side Structural Reform 2.0 (SSSR2.0), following a call from the Central Commission for Financial and Economic Affairs (CCFEA) to address price competition and eliminate obsolete capacity [2][11]. Core Insights 1. **Differences from Previous Reforms**: - SSSR1.0 focused on upstream industries like coal, steel, cement, and glass, while SSSR2.0 is expected to encompass both traditional industries (e.g., steel) and new industries (e.g., solar, auto, lithium batteries) [3][13]. - The current reforms may be driven by self-regulating industry associations and market players rather than solely by government mandates, which characterized SSSR1.0 [3][13]. - Economic conditions differ significantly; SSSR1.0 coincided with a boost from infrastructure projects, whereas the current economy faces challenges in property and consumption sectors [3][13]. 2. **Urgency of Reform**: - The solar industry is identified as having the highest urgency for reform due to low capacity utilization rates (73.5%) and negative return on equity (ROE) among top players [5][24]. - Other industries in need of reform include steel, lithium batteries, and auto [5][24]. 3. **Potential Outcomes**: - The pace of capacity elimination may be slower in SSSR2.0 compared to SSSR1.0 due to the different measures and types of enterprises involved (state-owned vs. private) [4][26]. - It may take longer for Producer Price Index (PPI) growth to return to positive territory due to weaker demand and less stringent supply-side controls [4][26]. Key Beneficiaries - The report highlights five stocks that could benefit from the anticipated supply-side measures: - **Tongwei** (Hold) - **Longi Green** (Hold) - **First Applied Material** (Buy) - **Lead Intelligent** (Buy) - **Bank of Jiangsu** (Buy) [7][35]. Additional Insights 1. **Historical Context**: - SSSR1.0 led to significant improvements in capacity utilization and ROE for industry leaders, suggesting that similar outcomes could be expected for leading firms in SSSR2.0 [30][31]. - During SSSR1.0, industries involved in reforms outperformed the CSI300 benchmark, with large caps generally outperforming small caps [31][33]. 2. **Current Economic Indicators**: - The report notes that PPI has been in contraction for 33 months since October 2022, indicating ongoing economic challenges [14][26]. - Capacity utilization rates have declined across various sectors, with electrical equipment and auto industries experiencing significant drops [16][29]. 3. **Regulatory Measures**: - Recent measures include standardized conditions for solar manufacturing and initiatives to curb price wars in the auto industry, indicating a proactive approach by regulatory bodies [21][22]. 4. **Market Sentiment**: - Investor expectations for SSSR2.0 are fueled by recent government discussions and publications highlighting the need for structural reforms to address overcapacity and competition issues [2][12]. This comprehensive analysis provides insights into the potential impacts of SSSR2.0 on various industries and highlights key stocks that may benefit from these reforms.

Investment Rating - The report maintains a positive outlook on the market with a base case index target for MXCN at 67 by the end of 2025, with a preference for sectors such as Energy, IT, and Utilities [36][38]. Core Insights - The report indicates a recovery in the MXCN index, driven by sectors like IT and Healthcare, with expectations of a market reversal by late January 2025 [9][11]. - The report highlights a cautious approach towards Consumer Discretionary and Staples, recommending a rotation into quality laggards and large caps over small and mid-caps [36][38]. - The anticipated GDP growth for China in 2025 is projected at 4.1%, slightly below the consensus of 4.2% [10]. Market & Sector Performance - MXCN sectors performance shows Consumer Discretionary up by 3.2% week-on-week, while Information Technology leads with an 8.3% increase [6]. - The MSCI China index has shown a year-to-date increase of 9.0%, with a notable recovery in sectors impacted by US tariffs [7][12]. Catalyst Calendar - The report outlines key upcoming macroeconomic indicators and sector-specific data releases, including PMIs and housing transactions, which could influence market movements [14]. Consensus Macro Forecasts - The consensus forecasts for China's GDP growth in 2025 are 5.1% for Q1, declining to 3.9% by Q4, indicating a gradual slowdown [16]. Index Targets - The MSCI-China index target for 2025 is set at 71, with a bull case of 80 and a bear case of 70, reflecting a potential upside of 13% from current levels [18]. - The CSI-300 index target for 2025 is projected at 3,787, with a bull case of 4,150, indicating a 10% upside potential [19]. Investment Recommendations - The report recommends overweight positions in Energy, IT, and Utilities, while advising underweight positions in Consumer Discretionary, Materials, and Staples [39]. - A barbell strategy is suggested, focusing on high-yielders and selected thematic plays in Internet and AI sectors [36][38]. Trading Statistics - Recent trading statistics indicate a net outflow of US$796 million from China equities, primarily driven by passive fund outflows, although there has been a positive development with resumed offshore ETF inflows [79][80].

Summary of Key Points from the Conference Call Industry Overview - The analysis focuses on the US consumer spending landscape, utilizing alternative data sources such as Barclays credit card spending and LightCast job openings data to gauge economic activity in the US [1][2][4]. Core Insights - **Consumer Spending Trends**: - Mid-April credit card spending data indicates that spending growth in 2025 matches or exceeds the average growth from previous years across nearly all retail categories [4][10]. - Recent data suggests a front-loading of spending in anticipation of tariff-induced price hikes, particularly in categories like automobiles [4][18]. - Consumer spending on dining out remains strong, indicating no significant weakness in consumption [4][11]. - **Job Openings and Labor Market**: - There are no alarming drops in job openings as of April 19, 2025, with most industries showing a downtrend that aligns with seasonal trends [4][50]. - The current downtrend in job openings is less severe than in 2023 and 2024, suggesting relatively strong momentum in new job openings [4][50]. - **Spending Momentum Analysis**: - The latest 4-week spending growth in 2025 is comparable to or better than the averages from 2018-2019 and 2023-2024 [5][10]. - Specific categories such as food-away-from-home and building materials show strong spending momentum, while categories like gas and furniture are experiencing some weakness [4][24][32]. Additional Important Insights - **Sector Variability**: - There is a notable dispersion in consumer sentiment across sectors, with some sectors, particularly IT, expressing concerns about consumer weakness [41]. - The correlation between credit card spending and retail sales remains high, indicating that spending trends are likely to reflect retail performance [43][47]. - **Future Outlook**: - Analysts express caution regarding the sustainability of current retail sales momentum due to recent declines in consumer sentiment [42]. - The credit card spending momentum is expected to lag if consumer weakness becomes established, similar to trends observed during the COVID pandemic [43]. - **Methodology**: - The analysis relies on merchant category codes associated with credit card transactions to measure spending growth across various retail categories, focusing on avoiding seasonal distortions [14][16]. This summary encapsulates the key findings and insights from the conference call, highlighting the current state of consumer spending and job openings in the US economy, along with potential future trends and sector-specific observations.

Investment Rating - The report maintains a positive outlook for the China equity market, with a base case index target for MXCN at HK$80 for 2025, implying a 30% upside from current levels [17][26]. Core Insights - The report indicates a broad-based recovery in the MXCN/CSI300 indices, driven by national team buying and expectations of new policy easing, with a modest increase of 1.6% week-on-week [8]. - The report highlights a potential easing of US-China trade tensions, with improved macro data from China leading to a more favorable QMI reading [9]. - The investment strategy suggests a focus on high-yield sectors such as Energy, IT, and Utilities, while advising caution in Consumer Discretionary and Materials [10][36]. Market & Sector Performance - The report provides detailed sector performance metrics, showing Consumer Discretionary up 1.5% week-on-week but down 20.2% month-to-date, while Real Estate outperformed with a 3.0% increase [6]. - The MSCI China index showed a 1.5% increase over the week but a decline of 14.6% month-to-date [6]. Catalyst Calendar - The report outlines key upcoming macroeconomic events in China, including LPR announcements and housing transaction data, which could influence market movements [13]. Consensus Macro Forecasts - The report presents GDP growth forecasts for China, projecting 5.0% for Q1 2025, slightly revised from previous estimates [15]. QMI & Index Targets - The report sets specific index targets for MSCI-China and CSI-300, with the latter projected at 3,772 RMB for 2025, indicating a 10% upside potential [18]. Investment Recommendations - The report recommends a barbell strategy focusing on high-yielders and selected thematic plays in Internet and AI sectors, while advising a rotation into quality laggards [36][38]. - Specific sector recommendations include Overweight (OW) for Energy, IT, and Utilities, while downgrading Consumer Discretionary and Materials to Underweight (UW) [38].

Summary of Key Points from the Conference Call Industry Overview - The conference call primarily discusses the performance of the **China/HK equity market** and various sectors within it, including **Consumer Discretionary**, **Communication Services**, **Financials**, **Information Technology**, **Industrials**, **Consumer Staples**, **Health Care**, **Real Estate**, **Materials**, **Utilities**, and **Energy** [5][6][10]. Market Performance - The **MXCN index** fell by **1.7%** week-over-week, with a defensive shift observed in the market [7]. - **Utilities** (+2.1%) and **Energy** (+0.9%) sectors outperformed, while **Real Estate** (-7.5%), **Consumer Staples** (-2.6%), and **Communication Services** (-2.3%) lagged [10]. - The **MSCI China** index has a year-to-date performance of **17.7%**, while the **HSI** has **18.0%** [6]. Sector Insights - **Consumer Discretionary** sector showed a year-to-date increase of **27.4%**, but experienced a weekly decline of **1.9%** [5]. - **Information Technology** sector has a year-to-date performance of **30.8%**, but also faced a weekly decline of **1.3%** [5]. - **Financials** sector saw a year-to-date increase of **7.5%**, with banks performing slightly better than insurance [5]. Earnings and Guidance - **Tencent** reported 4Q24 earnings that beat expectations, but its capital expenditure guidance was underwhelming [8]. - **CR Beer** and **Anta** indicated an uptick in sales momentum for the first two months of 2025 [8]. Economic Indicators - The **DXY** index rose by **0.4%** week-over-week to **104**, indicating a stronger dollar [9]. - The **China QMI** reading softened, indicating a borderline contraction in January and a return to borderline expansion in February, influenced by Lunar New Year seasonality and early impacts from higher US tariffs [7]. Investment Recommendations - The **2025 MXCN index target** is set at **67**, with a base case implying a **12% downside** from current levels [18]. - The **CSI-300 index target** for 2025 is set at **3,915**, with a potential upside of **7%** [19]. - Recommendations include rotating into quality laggards and focusing on large-cap stocks over small and mid-caps [36]. Flows and Positioning - Recent fund flows indicate a net outflow of **US$230 million** from active funds, while passive funds saw a net inflow of **US$853 million**, primarily into offshore listed China equities [76]. - The **87 US/HK listed China equity ETFs** tracked by JPM recorded a net outflow of **US$463 million** over a recent period, reversing previous inflows [81]. Macro Forecasts - Consensus macro forecasts for **China** predict GDP growth of **4.9%** in Q1 2025, slightly down from previous estimates [14]. - CPI forecasts for **China** indicate a modest inflation rate of **0.3%** in Q1 2025 [16]. Additional Insights - The call highlighted the importance of monitoring US trade policy, especially with upcoming reciprocal tariffs starting on April 2 [9]. - The **property cycle** in China is also a focus, with trends in residential property sales being monitored closely [39][40]. This summary encapsulates the key points discussed in the conference call, providing insights into market performance, sector dynamics, economic indicators, and investment recommendations.