Weak China activity data adds to stimulus pressure

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Chinese activity data for July (released on 15 August) broadly missed expectations, adding to downward pressure on Chinese equities and the yuan. Fixed-asset investment for January–July slipped to a 31-month low of 3.4% year-on-year, dragged lower by the property sector. July retail sales growth softened to 2.5% year-on-year (versus +4% consensus) amid contracting auto, mobile, and home appliance sales. Industrial production growth slipped to 3.7% year-on-year, reflecting both weaker external trade and weather disruptions. Just prior to the data, the People’s Bank of China delivered a surprise 15-basis-point cut to its one-year medium-term lending facility (MLF), and a 10bps cut to the short-term 7-day repo rate.

The weak activity figures, which follow lackluster credit growth and negative real estate and wealth sector developments, have added to a bearish backdrop for investors. But while signs of a deeper growth deceleration are a concern, they should not be the only consideration for investors reviewing their China exposure:

Weak data and property pain will increase pressure on policymakers to take more direct and urgent action. China’s limited policy support to date has disappointed, putting pressure on both our GDP forecasts and the yuan. But Tuesday’s surprise MLF cut offers the clearest signal yet of a shift to monetary easing, and we expect more to come. We anticipate 1–2 more reserve requirement ratio (RRR) cuts and 10–20bps in additional medium-term lending facility (MLF) cuts into year-end. What is less clear is whether there will be more direct fiscal support or action to help the property market. With sentiment very bearish, we think any direct property-focused assistance—such as lowering down payments, allowing refinancing, funding support for distressed developers, or relaxing purchase restriction in first- or second-tier cities—could rebuild both investor and consumer confidence in the recovery.

Absent more clarity, investors can position for both earnings resilience and potential stimulus beneficiaries. With limited clarity on the next steps for policy support, we think investors can consider positioning in both defensive pockets of resilience and in stocks that would benefit if we see more direct support for consumption. Online gaming and advertising companies offer more defensive characteristics compared to the broader internet sector in China. This is due to resilient cash flows and lower geopolitical exposure, offering a relative haven if the consumption recovery in China continues to underperform. On the other hand, a scenario where more consumption-oriented stimulus is rolled out could boost e-commerce companies' revenues, driving a rerating for stocks in this segment, which are currently trading around 13.4 times price to earnings—roughly 1.7 standard deviations below their historical average.

Narrower-than-expected US investment restrictions on China and ebbing domestic regulatory pressure are both helpful. A long-awaited White House ban on US investments in China proved narrower than initially feared, with a number of key carveouts, no retroactivity, and no sector-wide restrictions. We think the relatively limited scope means China is less likely to pursue a significant tit-for-tat response, such as restricting exports of rare earth metals or critical minerals. Separately, resolution to several high-profile domestic regulatory cases in the internet space has been eclipsed by macro concerns. With China signaling more support for the development of the private sector and clearing the way for less restrictive development in areas like AI, we think the scope for incremental tech regulatory risk has declined.

So while the direction of Chinese risk assets remains heavily reliant on the delayed macroeconomic rebound, we think it is not the only factor to consider. We still expect more policy support to materialize soon, and we retain our constructive view on Chinese equities. At the same time, we acknowledge the risk of further disappointment in the near term delaying the recovery and warranting a more defensive stance. Within Chinese equities, we keep our growth-tilted barbell strategy with heavier exposure to direct recovery and stimulus beneficiaries on one side, and more defensive exposure on the other to areas that offer recurring cash flows like game developers and the utility sector. Our stance on Chinese equities also factors into our most preferred stance on emerging equities in our global strategy.