Key takeaways from China’s Q1 economic data and the outlook for Chinese equities
Gross Domestic Product (GDP) growth saw a meaningful rebound in Q1 to 5.0% from 4.5% y/y in Q4.1 Growth in the quarter was mainly led by trade, with goods trade reaching a record high for Q1.
What’s impressive here is that the strong trade data is not from export-front loading because there was also a surge in imports. This suggests genuine production and continued demand for Chinese products.
It’s also encouraging to see China’s “new economy” segment holding up, with high tech and green manufacturing outperforming.
Year-to-date industrial production grew by an impressive 6.1% y/y, which helped offset the continued domestic demand soft patch. Retail sales grew by 1.7% y/y in March.1
I believe that the March PPI turning positive, ending 41 consecutive months of deflation, appears to reflect both cyclical tailwinds and the early impact of anti-involution policies.
I see this as the start of a gradual normalization rather than the beginning of a strong inflation cycle.
More importantly, firmer prices are likely to lead to better business margins and profits, which then boost private investment confidence.
I’m optimistic that more anti-involution policies are likely to gather steam and we could be witnessing the start of the long-sought after virtuous cycle.
A positive outlook for Chinese equities
Chinese assets are increasingly being viewed as a safe haven. Since the conflict in the Middle East began, Chinese equities have declined far less than global peers, while the RMB and government bond yields have remained notably stable.
In addition, stocks and bonds in China have also moved in positive correlation for the first time in two years, reflecting increased capital inflows.
China benefits from limited direct exposure to Middle‑East supply disruptions and strong policy insulation.
As such, there are two sectors that could benefit from this economic resilience.
The first is energy, resources and upstream industrials such as oil and gas services, industrial metals and materials; Chinese players in this segment serve as a hedge against geopolitical volatility.
The other segment worth watching is China tech, the high-end manufacturing and export-linked industries. Recent strong trade numbers reinforce this theme.
I believe that the stronger RMB signals macroeconomic and policy stability and could attract foreign capital inflows into Chinese equities and bonds.
Compelling equity valuations, combined with a stable currency, provide potential attractive total returns that foreign investors are unlikely to overlook.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
