China market pulled back on a weekly basis, while trade and credit data came in better than expected

Overview

This report is Goldman Sachs’ weekly China macro and portfolio strategy update, covering this week’s China equity market performance, May inflation, trade and credit data, fund flows, Hong Kong IPOs, the FTSE China index review, the A-H rotation model, earnings expectations, valuations, and more. The report notes that the market weakened slightly this week, but macro data on trade and credit came in better than expected, southbound flows continued, and Hong Kong fundraising activity remained active.

Core views

The core view is that China’s market is currently showing a combination of "divergent price pressures, relatively strong growth data, and pressured equity performance" in the near term: energy is pushing PPI inflation higher, while core CPI is moderating due to weaker service prices; May trade and credit data both beat expectations, supporting macro fundamentals; on the equity side, MSCI China and CSI300 saw slight pullbacks, with software, retail, consumption, and growth styles weaker, while financials relatively outperformed. At the model level, the A-H rotation signal indicates H-shares may slightly outperform A-shares over the next three months.

Analysis framework

The report uses a weekly market monitoring framework, assessing index performance, sector moves, style factors, valuations, consensus earnings expectations, fund flows, IPO fundraising, index rebalancing, and macro data from a unified portfolio strategy perspective, while also incorporating Goldman Sachs’ proprietary A-H rotation model and barometer to judge relative performance.

Methodology notes

• Market strategyMSCI China/CSI300 weekly performance and valuation framework

  Measures the state of the China equity market using index moves, sector performance, 12-month forward P/E, and consensus EPS growth.

  The report compares weekly performance, valuations, and earnings expectations of MSCI China and CSI300 to identify the relative strength of offshore versus onshore China equities and the valuation backdrop.

• Macro data trackingInflation, trade, and credit data monitoring

  Tracks PPI, core CPI, exports, imports, and credit data to assess the impact of the macro environment on the market.

  The report emphasizes that May PPI rose on energy, core CPI moderated, and both trade and credit data beat expectations, indicating that macro signals are not one-dimensional.

• Fund flows and index positioningSouthbound flows, Hong Kong IPOs, FTSE China index review, and A-H rotation model

  Uses fund flows, passive index adjustments, IPO fundraising, and the A-H relative model to identify structural market opportunities.

  The report tracks southbound inflows, the Hong Kong IPO pipeline, potential passive flows from FTSE China index rebalancing, and uses the A-H rotation model to assess the near-term relative performance of H-shares versus A-shares.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MSCI China/MXCN

  Benchmark for the offshore China equity market

  Strengths

  Consensus 2026/27E EPS growth is 17%/18%, 12-month forward P/E is 10.9x, and southbound flows remain positive.

  Weaknesses

  Down 0.9% this week, with software and retail sectors being clear drags.

  Comparison

  Compared with CSI300, its valuation multiple is lower; expected earnings growth is lower than CSI300 in 2026E but higher in 2027E.

  Risks

  Offshore risk appetite, sector rotation, index fund flows, and macro data volatility may affect performance.

• CSI300/A-shares

  Onshore China large-cap equity index

  Strengths

  Financials and dividend-yield style performed relatively well, and better-than-expected May credit data helps support sentiment toward domestic assets.

  Weaknesses

  Down 0.8% this week, with weak performance in IT and New China-related styles.

  Comparison

  12-month forward P/E is 14.3x, higher than MSCI China; consensus 2026/27E EPS growth is 24%/16%.

  Risks

  If credit improvement proves unsustainable, core demand remains weak, or growth sectors continue to pull back, A-shares’ relative performance may come under pressure.

• H-shares/Hong Kong equities

  Offshore China equities and Hong Kong financing market

  Strengths

  The A-H rotation model suggests H-shares may slightly outperform A-shares over the next three months; the Hong Kong IPO market is active, and southbound inflows are about US$39bn year to date.

  Weaknesses

  Consumer discretionary and growth styles have lagged within H-shares.

  Comparison

  Relative to A-shares, H-shares are receiving short-term support from both the model and fund flows.

  Risks

  Changes in Hong Kong market liquidity, financing windows, passive fund flows, and global risk appetite may amplify volatility.

• China macro assets: RMB, rates, and bonds

  The report focuses on policy signals related to China FX, rates, and Bond Connect

  Strengths

  The report mentions a stronger RMB and the policy anchors behind lower rates, and notes media reports that southbound Bond Connect has been opened to domestic insurance institutions.

  Weaknesses

  Quantitative data disclosed in the main text are limited and require further verification with the full thematic report.

  Comparison

  Compared with the equity market, FX and rates are more driven by policy expectations and the macro data mix.

  Risks

  Policy changes, the inflation path, capital flows, and adjustments to cross-border investment rules may affect prices.

Key data

• Market performance this weekMSCI China down 0.9%, CSI300 down 0.8%The market was mainly dragged down by the software and retail sectors.
• Main lagging sectorsSoftware down 9.0%, retail down 7.7%Reflects near-term pressure on growth and consumption-related sectors.
• 12-month forward valuationMSCI China at 10.9x, CSI300 at 14.3xBased on the forward P/E disclosed in the report.
• Consensus EPS growth2026/27E: MSCI China 17%/18%, CSI300 24%/16%Based on I/B/E/S consensus estimates.
• Southbound flowsAbout US$0.5bn inflow this week, about US$39bn year to dateSouthbound flows remain an important incremental indicator for offshore China assets.
• May inflationPPI rose to 3.9% YoY, core CPI moderated to 1.1% YoYPPI was mainly driven by energy, while the moderation in core CPI may be related to softer travel-related service prices.
• May tradeExports up 19.4% YoY, imports up 27.5% YoYBoth exports and imports were above consensus expectations.
• May creditCredit data beat expectationsMainly due to stronger-than-expected bank lending.
• Hong Kong IPOs65 companies listed year to date, raising about US$23bn; more than 400 companies are in the queue for Hong Kong listingsThe queue does not include confidential filings.
• FTSE China index reviewTech Hardware & Semis, Consumer Retail, and Internet/Media may receive larger passive inflows; Insurance & Fins Services and Energy may face larger outflowsDerived from the FTSE China index review and estimates of potential passive fund flows.
• A-H rotation modelH-shares may slightly outperform A-shares over the next three monthsBased on the Goldman Sachs A-H rotation model signal in the report.

Impact & implications

In terms of investment implications, the report supports continued focus within China assets on improving macro data and policy-related themes, but near-term market risk appetite remains affected by sector divergence, the inflation mix, weak service prices, and pullbacks in growth sectors. For offshore markets, southbound flows, active Hong Kong IPOs, and the A-H rotation signal provide relative support for H-shares; index rebalancing may also create sector-level differences in passive fund inflows and outflows.

Risks

• Energy-driven PPI inflation may rise further, potentially increasing cost pressures.
• Moderating core CPI reflects weak service demand or soft travel-related prices, which may weaken signals of improving domestic demand.
• Software, retail, consumer discretionary, and growth styles have shown phase-specific weakness.
• FTSE China index rebalancing may lead to passive outflows from Insurance & Fins Services and Energy.
• Matters such as regulatory talks with online travel platforms and the release of the annual antitrust enforcement report suggest that policy and regulatory risks still need to be monitored.
• The report’s disclosures highlight risks related to market liquidity, stock borrowing constraints, exchange-rate volatility, and loss of investment principal.

What to watch

• Whether better-than-expected May trade and credit data can continue in subsequent months.
• Whether the divergence between rising PPI and moderating core CPI persists, and whether travel-related service prices recover.
• The pace of southbound inflows and the actual impact after southbound Bond Connect opens to domestic insurance institutions.
• Whether the RMB2tn plan related to China data center construction will be implemented, and how it will affect the technology hardware, semiconductor, and infrastructure chain.
• The subsequent listing pace and fundraising scale of the more than 400 companies in the Hong Kong IPO pipeline.
• Sector passive fund inflows and outflows resulting from the FTSE China index review.
• Whether the A-H rotation model’s signal that H-shares may slightly outperform A-shares is validated by the market.