As Chinese markets prepare for higher tariffs and hope for more government stimulus, Citi analysts say their top pick is high-yielding mainland stocks. “As Treasury yields fall, yields in the A-share market become more attractive,” Citi China equity strategists said in a report last week, referring to stocks traded in mainland China. The continued decline in China’s 10-year government bond yield – which fell to a record low of around 1.58% this month – prompted the People’s Bank of China to stop buying government bonds on January 10. In the week since, the yield has been little changed at around 1.64%. Citi analysts said China’s 10-year government bond yields could fall further given expectations of a 50 basis point interest rate cut by the People’s Bank of China over the next year and the statutory reserve ratio (the amount of cash banks are required to keep). One basis point is equal to 1/100 of a percentage point (0.01%). Meanwhile, rising U.S. Treasury yields, driven at least in part by expectations of U.S. tariff-induced inflation, caused Hong Kong’s Hang Seng Index to plunge more than 8% between early December and mid-January, Citi said. Mainland China stocks fared better, falling 6%, which Citi analysts attributed to loose monetary policy and lower Chinese government bond yields. Citi’s three mainland China stock picks in terms of yield are Shanghai-listed electric bus company Yutong Bus and two Shenzhen-listed companies: Gree Electric Appliances and Ping An Bank. Ye Yuhua, a fund manager at Guangzhou Liangdian Private Equity, said that long-term investors have favored Chinese high-yield stocks for many years, and this advantage has become more obvious as economic growth slows and bond yields fall. He said yields on bank and appliance stocks tend to be between 4% and 6%, well above the benchmark government bond yield of less than 2%. The concern, however, is that high dividend yields are not necessarily a given, especially for stocks that are sensitive to commodity prices. Deciphering the impact of tariffs President-elect Donald Trump has vowed to impose additional tariffs on Chinese goods of at least 10% shortly after taking office on Monday. Citi economists expect that U.S. tariffs will gradually increase by about 15 percentage points starting in the second quarter. They estimate that it may reduce China’s exports by 6% and GDP by 1%. Citi analysts said that based on recent meetings with officials from various Chinese departments, their “key conclusion is that China aims for stable economic growth, which will depend on external tariffs and domestic stimulus measures.” Analysts expect a short-term rise in stocks in March if the United States and China reach an agreement on gradually increasing tariffs. “But this is unlikely to change China’s deflation outlook or resolve structural issues,” Citi analysts said. They expected “bank stocks with high dividend yields will be more attractive to onshore investors seeking yield.” China Week The V report stated that GDP will grow by 5% in 2024, in line with the government’s target. But Larry Hu, chief China economist at Macquarie, pointed out that taking into account falling prices and other deflationary pressures, the economy will grow by only 4.2% in 2024. Policymakers’ ability to reverse the deflationary trend of nearly two years will depend on the effectiveness of fiscal policy and support for the housing market. Chinese authorities have pledged to increase the fiscal deficit at the annual National People’s Congress meeting in March, when they are also expected to unveil other stimulus measures. —CNBC’s Michael Bloom contributed to this report.
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