China's Slow-Motion Stock Rally: Fund Manager Preferences and Market Dynamics

This analysis is based on the Reuters report [1] and internal market data [0]. Fund managers are shifting to industrial stocks (battery, chemicals, solar) due to anti-involution policies aimed at improving corporate margins [1]. Tech shares remain volatile, as indicated by 31.1B yuan in outflows from the STAR50 ETF over three months [1]. YTD returns are strong: CSI300 (~16%), Hang Seng (~30%) [1,2], though recent monthly dips (Shanghai -1.57%, Shenzhen -1.92% [0]) suggest profit-taking. Foreign holdings of Chinese equities reached 3.5T yuan by Sept 2025, below the 2021 peak but rising [1].

1. Sector Rotation
   : Industrial stocks are preferred over tech due to policy support and lower volatility [1].
2. Valuation Appeal
   : Chinese indices trade at ~12x earnings, significantly cheaper than S&P500 (28x) and Nikkei (21x) [1], attracting foreign investors.
3. Risk Balance
   : Positive sentiment from inflows is offset by property sector risks (Vanke) and an 8-month manufacturing PMI contraction (49.9 in Nov [5]).

• Property Sector
  : Ongoing pressures (e.g., China Vanke) may impact market sentiment and related industries [1].
• Manufacturing Slowdown
  : Prolonged contraction (PMI <50) could weigh on industrial stock performance [5].
• Tech Volatility
  : STAR50 outflows signal investor caution, leading to short-term price fluctuations [1].

• Industrial Stocks
  : Anti-involution policies and attractive valuations present opportunities [1].
• Foreign Inflows
  : Potential global rate cuts may boost foreign investment in Chinese equities [3].

• YTD Returns
  : CSI300 (~16%), Hang Seng (~30%) [1,2].
• ETF Flows
  : +13.5B yuan (CSI Battery), +11.2B (CSI Chemicals), -31.1B (STAR50) [1].
• Valuations
  : ~12x earnings (Shanghai/Hang Seng) vs S&P500 (28x) [1].
• Manufacturing PMI
  : 49.9 (Nov2025) [5].