As China progresses into the year 2025, the nation is poised to undergo significant adjustments in both policy and market dynamics, setting the stage for a clearer trajectory in its economic fundamentalsWhile challenges from external environments persist, analysts from Fidelity International emphasize that a series of counter-cyclical adjustment measures warrants a level of optimism.

During an online media briefing focused on China's macroeconomic outlook on January 4th, Fidelity representatives highlighted proprietary tracking indicators suggesting that after a prolonged period of dual-track development, China's economic growth will transition into a rebalancing phaseThe buzzword for 2025 is likely to be "stability," with expectations that the growth focus will shift towards domestic demand, paving the way for a consumption-driven model of high-quality development

Increasing fiscal and monetary policy easing is anticipated, providing a more robust support system for household sectors and enhancing economic growth, which could lead to a gradual rise in both the Consumer Price Index (CPI) and the Producer Price Index (PPI).

Liu Peiqian, a prominent economist at Fidelity International, projected that China's GDP growth is likely to stabilize at around 4.5% in 2025, accompanied by a moderate upward trend in inflation rates.

In view of the potential impact from slowing global demand and external uncertainties, Liu anticipates the introduction of more robust easing policies in 2025. Fidelity plans to keep a close eye on the synergy between monetary and foreign exchange policies, with expectations that fiscal policies will further concentrate on stimulating consumption, local government debt management, and easing measures in the real estate sector.

Liu noted, “The announcement for the next large-scale fiscal stimulus is likely to occur during the two sessions in March

Overall, we expect that policy adjustments will remain gradual but proactively address potential risksThe ongoing long-term transformation of China’s economy is steadily advancing, and we anticipate more detailed strategic growth plans in the upcoming 15th Five-Year Plan to be published in 2025.”

Prospects for the A-Share Market:

Optimistic about the resilience of the Chinese economy, awaiting policy momentum

Fidelity's Chief Investment Officer, Nie Yixiang, stated, “Overall, we maintain a cautiously optimistic view on the A-share market for 2025.”

Nie commented on the policy landscape, which features a series of stimulus measures introduced last year and pivotal meetings in December that laid out economic strategies, demonstrating policymakers' commitment to bolstering economic growth

This has notably boosted investor confidence.

From a fundamental perspective, Fidelity foresees a stabilization of the economy alongside a rebound in corporate profitabilityThe expectation is that China's economy will transition out of its bottoming phase and enter a growth path in 2025, although more time is needed for validationFurthermore, the current valuation levels of A-shares are deemed attractive when compared both horizontally and vertically, coupled with the substantially lower allocation of Chinese assets by global investors and their low correlation with other global assets“We expect that by 2025, foreign capital will flow back into the Chinese market, increasing allocation to core Chinese assets,” he emphasized.

On specific sectors, Nie Yixiang expressed an interest in technology, high-end manufacturing, consumption, and healthcare sectors that benefit from policy support, particularly focusing on technological innovation and domestic demand

alefox

China's tech and advanced manufacturing sectors hold leading competitive advantages globally; additionally, consumption demand is poised for considerable growth against the backdrop of rising per capita GDPIn a low interest-rate environment, his outlook remains positive for dividend assetsWith policies encouraging listed companies to increase dividends and strengthen investor returns, dividend assets can provide stable and long-term returns to investorsTherefore, we will also keep an eye on banking and financial assets, cyclical assets like coal and oil, and relatively stable sectors like transportation, telecommunications, and storage logistics.

Regarding risks, Nie highlighted external risks such as potential US tariff hikes and geopolitical frictions

He noted that many Chinese companies tend to exhibit resilience, adapting flexibly to mitigate the impacts on corporate profitability, based on past experiencesAdditionally, continuous monitoring of China’s macro policies in addressing both internal and external challenges is essential.

Outlook for the Fixed Income Market:

Easing expectations likely to provide robust support for the bond market

Chang Hao, a Fixed Income Fund Manager at Fidelity, noted, “In 2024, bond yields saw significant upward movement following stimulus measures introduced in September; however, they returned to a downward path afterwards

This was due in part to the central bank providing adequate liquidity support to the market, while fundamental inflation data continues to face certain pressuresLooking ahead to 2025, we anticipate that the policy side will maintain the easing signals that have been persisting since last year. Under a ‘more proactive’ guideline, monetary policy is set for further interest rate cuts, and this year’s fiscal stimulus is expected to reach historically high levels, providing downward pressure on interest rates for the bond market. Regardless of whether it's long-term bonds or high-grade credit bonds, the current yield levels remain attractive for conservative investors given the declining cost of funds.”

On interest rates, Chang believes that the rising general fiscal deficit in 2025 will increase the supply of interest rate bonds; however, the anticipated overall impact on the bond market will be mild

The issuance pace of interest rate bonds may be more balanced compared to 2024, alleviating short-term supply pressures on the marketMoreover, this year’s moderately easing monetary policy will collaborate with fiscal initiatives, enhancing the attractiveness of the bond market.

On credit analysis, he pointed out that while credit spreads have narrowed over the last two years, 2025 is expected to present solid opportunities for spread contraction and structural opportunities between sectors, thereby enriching investment returns“We anticipate that the ‘asset scarcity’ trend may continue into 2025, and major sectors like local government financing and bank bonds may not see significant net financing growth over last year, resulting in an overall supply of credit bonds that does not increase substantially

Additionally, institutional demand for yields will likely bolster strong credit allocation needs, aiding in the compression of credit spreadsCurrently, from a spread perspective, various sectors are nearing levels observed at the beginning of last year, suggesting room for credit bonds to climb in value this year.”

Furthermore, Fidelity is keen on monitoring structural opportunities across industries, ratings, and maturities, such as improvements in cash flows for some local government bonds due to debt restructuring, alongside asset quality advancements in certain regional banks as a result of debt management efforts“Moreover, during the process of credit spread compression, the market typically transitions from high liquidity, high-credit quality bonds to those with lower liquidity and relatively weaker credit quality as well as longer maturities, making such periodic opportunities noteworthy,” Chang noted.