Chinese authorities have pledged to increase the fiscal deficit during their annual parliamentary meeting in March, aiming to stimulate a sluggish economy. Despite these efforts, the Chinese 10-year government bond yield has remained relatively stable, trading around 1.64% over the past week. Long-term investors continue to favor high-yield stocks in China, as these investments offer more attractive returns compared to low-yield government bonds.
In 2024, China's economy expanded by only 4.2%, facing the downturn pressures of deflation and lower prices. Meanwhile, Citi economists have projected that U.S. tariffs will begin in the second quarter, incrementally rising by approximately 15 percentage points. These tariffs could potentially impact China's exports by 6% and reduce GDP growth by 1%.
Amid these challenges, mainland Chinese stocks have shown resilience, declining by only 6% during the recent market downturn. The People's Bank of China ceased its government bond purchases on January 10, responding to the persistent decline in the country's 10-year government bond yield. Citi analysts predict further decreases in these yields, driven by anticipated interest rate cuts and reserve ratio reductions.
"Yield plays in the A-share market have become more attractive amid the government bond yield drop," – Citi China equity strategists
In this environment, banks and home appliance stocks have demonstrated yields ranging from 4% to 6%, significantly surpassing the sub-2% government bond yield benchmark. If the U.S. and China reach an agreement to gradually implement tariff hikes, Citi analysts foresee a short-term stock rally in March.
The Hong Kong Hang Seng Index has experienced a more than 8% decline between early December and mid-January, influenced by rising U.S. Treasury yields. Nevertheless, China's GDP grew by 5% in 2024, aligning with government targets. According to Citi China equity strategists, the current yield environment has rendered high-yield stocks more attractive compared to government bonds.
"But this is unlikely to alter the deflationary outlook in China or resolve structural issues," – Citi analysts
Citi's top mainland Chinese stock picks by yield include Shanghai-listed electric bus company Yutong Bus and two Shenzhen-listed firms: Gree Electric Appliances and Ping An Bank. These selections reflect the growing appeal of high dividend yield bank stocks to investors in light of the current bond yield landscape.
"High dividend yield bank stocks will become more attractive to investors," – Citi analysts
As Chinese authorities aim to navigate economic challenges through fiscal adjustments and strategic investment opportunities, their decisions will have significant implications for both domestic and international markets.
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