Eliza Wong
Goldman Sachs Bullish on Chinese Equities Despite Market Volatility
Global investment giant Goldman Sachs has reaffirmed its overweight rating on Chinese A-shares and H-shares, projecting 8% and 3% upside respectively over the next 12 months. This endorsement comes amid heightened volatility in Chinese markets, with the Shanghai Composite dropping 1.15% and the Hang Seng Index falling 1.35% in recent sessions. The firm’s analysis suggests that current market movements represent a liquidity-driven bull market with substantial fundamental support, challenging conventional narratives about retail-driven speculation.
According to Goldman analysts Kinger Lau and Si Fu, the current rally differs significantly from historical patterns. Institutional investors—both domestic and international—have emerged as the primary capital providers rather than retail speculators. This structural shift indicates more sustainable momentum behind the current market appreciation, supported by improving corporate earnings and unprecedented institutional participation.
Institutional Inflows Reach Cyclical Highs
Data from Goldman’s prime brokerage division reveals that global hedge funds recorded their highest monthly inflow into A-shares in August since records began. This surge in foreign institutional interest coincides with increased domestic institutional participation, creating a powerful dual engine for market appreciation.
– Domestic mutual funds have rapidly increased equity exposure, with cash ratios in portfolios hitting five-year lows
– Chinese insurance companies have boosted stock holdings by 26% year-to-date
– Private fund assets under management have grown from 5.0 trillion yuan to 5.9 trillion yuan since September 2024
Northbound trading activity through Stock Connect programs has simultaneously reached historical peaks, reflecting strengthened foreign conviction in Chinese equity markets. Li Changfeng, market strategy director at AllianceBernstein, notes that sustained foreign institutional accumulation of A-shares reflects growing international recognition of policy improvements and valuation repair potential.
Global Context: China Joins the Liquidity Party
Goldman’s analysis positions China’s market performance within a broader global phenomenon of liquidity-driven valuation expansion. Approximately 70% of the Morgan Stanley Capital International All Country Index’s gains have originated from price-to-earnings multiple expansion rather than earnings growth. In this context, China appears as a late participant in the global liquidity feast rather than an outlier.
The firm emphasizes that unlike many global markets experiencing pure multiple expansion, Chinese equities combine valuation growth with fundamental improvement. This dual engine creates a more sustainable foundation for continued appreciation despite recent volatility.
Earnings Growth Supports Valuation Expansion
Corporate profits grew 3% for onshore listed companies and 6% for offshore listed entities during the first half of 2024, providing fundamental support for current valuations. Specific sectors including technology and artificial intelligence have demonstrated particularly strong earnings revision trends, while corporate cash returns to shareholders have reached record levels.
Goldman projects mid-to-high single-digit normalized profit growth for listed companies between 2025 and 2027, suggesting the current rally enjoys fundamental underpinnings beyond pure liquidity effects. This earnings growth potential distinguishes China’s market dynamics from purely speculative rallies occurring elsewhere.
Trillion-Yuan Capital Rotation Potential
The most compelling aspect of Goldman’s analysis concerns the unprecedented capital rotation potential from Chinese real estate and cash deposits into equity markets. Chinese household assets remain dramatically overweight real estate (55%) and cash deposits (27%), with equities and mutual funds representing only 11% of allocations—far below global averages.
As property market adjustments continue, trillions of yuan appear poised for gradual, long-term migration toward equity investments. Several factors drive this structural shift:
– 80 trillion yuan in new household deposits since 2020, with 55 trillion considered excess savings
– 31 trillion yuan in wealth management products and 15 trillion in money market funds providing additional potential equity sources
– Over 14 trillion yuan in annual new capital seeking investment alternatives as property loses appeal
This reallocation potential represents perhaps the most significant long-term bullish factor for Chinese equities, dwarfing short-term foreign flow considerations.
Institutional Ownership Gap Presents Opportunity
Current institutional ownership of A-shares stands at just 14%, dramatically below emerging market (50%) and developed market (59%) averages. Goldman calculates that bringing institutional ownership to emerging market levels would inject 14 trillion yuan into A-shares, while reaching developed market standards would represent 30 trillion yuan in potential inflows.
This ownership gap highlights the structural transformation occurring within Chinese markets as institutional participation increases. Unlike previous cycles dominated by retail speculation, the current environment features growing institutional influence that should reduce volatility and improve price discovery.
Regulatory Reforms Strengthen Market Foundation
Recent regulatory developments have significantly improved the structural foundation for sustained equity appreciation. The New National Nine Articles (新国九条) market reforms have enhanced shareholder returns through improved corporate governance and dividend policies. Simultaneously, the introduction of patient capital from long-term institutional investors has reduced market volatility and improved price stability.
Goldman analysts note that conditions for a slow bull market appear more solid than at any previous point, with regulatory improvements creating a more attractive environment for both domestic and international investors. These structural enhancements complement cyclical improvements in corporate earnings and liquidity conditions.
International Perspective: Growing Global Allocation
Bank of America’s fund manager surveys indicate rising global investor willingness to increase Chinese asset allocations. This sentiment appears reflected in actual flow data, with the KraneShares CSI China Internet ETF growing from $83.23 billion to $94.07 billion between August and September—a 13% increase driven primarily by institutional accumulation.
The ETF’s largest holdings include Tencent Holdings (腾讯控股) and Alibaba Group (阿里巴巴集团), suggesting foreign investors particularly favor China’s internet giants despite regulatory challenges. This selective approach indicates sophisticated capital allocation rather than blanket enthusiasm for Chinese equities.
Sustained Momentum Requires Earnings Delivery
While Goldman remains optimistic about Chinese equity prospects, the firm acknowledges that sustained valuation expansion requires continued earnings delivery. Current valuations at 13.5 times forward earnings for MSCI China and 14.7 times for the CSI 300 index remain below historical bull market peaks of 15-20 times earnings, providing room for additional multiple expansion.
However, further revaluation depends on corporate profit growth validating current optimism. Meng Lei, China equity strategist at UBS Securities, echoes this perspective: Looking forward, we believe overseas investors have ample room to increase A-share allocations. As China’s economy further recovers, corporate innovation drives profit growth, and anti-involution policies take effect, global investor confidence in A-shares will further improve.
Sector Opportunities: Technology and AI Lead
Specific sectors demonstrate particularly strong fundamental improvement. Technology and artificial intelligence companies have shown accelerating earnings revisions alongside innovative breakthroughs. This sector leadership provides confidence that China’s market appreciation reflects genuine transformation rather than speculative excess.
The concentration of foreign investment in China’s technology leaders suggests international investors recognize these structural advantages. Rather than betting on broad economic recovery, sophisticated capital appears focused on sectors with sustainable competitive advantages and global relevance.
Strategic Implications for Global Investors
Goldman’s overweight recommendation carries significant implications for global portfolio construction. The combination of reasonable valuations, improving fundamentals, and massive capital rotation potential creates a compelling investment case despite short-term volatility. International investors should consider increasing Chinese equity allocations through both direct A-share investments and H-shares listed in Hong Kong.
The analysis suggests that waiting for perfect entry points may prove costly given structural capital flows. Instead, gradual accumulation during periods of volatility appears the most prudent approach for long-term investors seeking Chinese exposure.
Global asset allocators should monitor several key indicators to validate Goldman’s thesis:
– Continued institutional inflow data through Northbound trading channels
– Corporate earnings delivery relative to expectations
– Progress in household asset reallocation from property to equities
– Regulatory developments supporting market reform and shareholder returns
Implementation Considerations: Accessing Chinese Markets
International investors can access Chinese equities through multiple channels, including:
– Direct A-share purchases via Stock Connect programs
– H-shares listed in Hong Kong
– ADRs of Chinese companies listed internationally
– ETFs focused on specific sectors or broad market exposure
Each approach offers distinct advantages regarding liquidity, transparency, and exposure characteristics. Investors should consider their specific objectives and constraints when determining appropriate implementation strategies.
Forward Outlook: Cautious Optimism Warranted
Goldman’s analysis presents a compelling case for sustained Chinese equity appreciation driven by structural factors rather than cyclical enthusiasm. The combination of reasonable valuations, earnings growth, institutional participation, and massive reallocation potential creates a powerful investment thesis that transcends short-term market fluctuations.
While risks remain—including geopolitical tensions, regulatory uncertainty, and economic headwinds—the structural case for Chinese equities appears stronger than at any point in recent years. Investors should consider increasing allocation to Chinese equities through appropriate vehicles while maintaining diversified exposure across sectors and market segments.
The overweight A-shares and H-shares recommendation reflects deep fundamental analysis rather than short-term momentum chasing. As global liquidity conditions evolve and Chinese markets mature, the structural transformation underway may create generational investment opportunities for discerning investors.
Monitor quarterly earnings reports, monthly flow data, and policy developments to validate the investment thesis. Consider gradual position building during market weakness rather than chasing breakouts. Most importantly, maintain a long-term perspective that recognizes the structural nature of current market transformations.
