Chart of the Week
While the Chinese economy demonstrated resilience in the first half of the year, economic data from July and August painted a more concerning picture, with most indicators showing signs of weakness. The slowdown is primarily driven by a drop in domestic demand, including a decline in business investment. On the other hand, the export-driven manufacturing sector has remained relatively strong, even in the face of higher U.S. tariffs.
This economic downturn stands in sharp contrast to the remarkable performance of China’s equity markets. Since the start of the year, the MSCI China Index has surged 35%, fueled largely by excitement surrounding artificial intelligence following the pivotal “DeepSeek” moment.
What we’re witnessing is a “K-shaped” trajectory between the economy and the markets—a divergence that rarely offers reassurance for investors.
OUR ANALYSIS
The decline in business investment is no longer limited to the real estate sector; it’s now impacting manufacturing as well. This may be a result of the authorities’ efforts to curb industrial overcapacity and deflationary pressures.
Equity markets are somewhat optimistic about this approach, as higher prices could boost corporate profits. However, it’s a delicate balance for the government, since this policy risks slowing growth in the short term while the goal is to maintain a 5% growth rate.
The authorities will probably adjust their strategies based on economic developments. Additionally, they are reportedly considering measures to prevent the market rally from turning into a bubble, similar to the one that burst in 2015.
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Written on September 19 2025. Opinions subject to change.
See also: Banking Sector: Still Moderate Valuations
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