May trade and credit data both beat expectations; A-H rotation model points to relative outperformance of H-shares
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May trade and credit data both beat expectations; A-H rotation model points to relative outperformance of H-shares
China's export, import, and credit data for May all exceeded expectations, but the software and retail sectors dragged down the broad market; Goldman Sachs' A-H rotation model predicts that H-shares will slightly outperform A-shares over the next three months.
- May exports rose 19.4% YoY, and imports rose 27.5% YoY, both exceeding market expectations.
- May PPI rose 3.9% YoY (driven by energy), while core CPI rose 1.1% YoY (weakening tourism service prices).
- The MSCI China Index and CSI 300 fell 0.9% and 0.8% respectively this week, led by declines in software (-9.0%) and retail (-7.7%).
- Goldman Sachs' A-H rotation model shows that H-shares are expected to slightly outperform A-shares over the next three months.
- The HK IPO market remains active, with 65 companies listed so far this year, raising $23 billion.
- Year-to-date net inflows from Southbound funds reached $39 billion, with $500 million flowing in this week.
Report interpretation
Overview
This report is Goldman Sachs' weekly outlook for the Chinese market, focusing on tracking China's macroeconomic data for May (trade, credit, inflation), recent capital market performance (A/H share movements, sector divergence), and key developments such as HK IPOs and fund flows. The report notes that foreign trade and credit data were strong in May, beating market consensus, but domestic equities corrected due to drag from technology and consumer sectors. Additionally, the report provides model forecasts for the relative performance of A/H shares and the latest observations on the HK IPO market.
Core views
On the macro front, China's import and export growth accelerated significantly in May, with exports up 19.4% YoY and imports up 27.5% YoY, both higher than market consensus expectations; credit data also performed strongly due to better-than-expected bank lending. Inflation data showed divergence: driven by the energy sector, May PPI YoY growth expanded to 3.9%, while core CPI YoY growth slowed to 1.1%, mainly affected by weakening prices for tourism-related services. Regarding market performance, the MSCI China Index and CSI 300 Index fell 0.9% and 0.8% respectively this week. Sector divergence was evident, with financials performing well in both offshore and onshore markets (up 4.6% and 3.9% respectively), while information technology (software -9.0%/-3.1%) and discretionary consumption (retail -7.7%) lagged. On valuation, the 12-month forward P/E ratios for the MSCI China Index and CSI 300 were 10.9x and 14.3x, respectively. In terms of strategy and liquidity, Goldman Sachs' A-H share rotation model predicts that H-shares are likely to slightly outperform A-shares over the next three months. The HK IPO market remains active, with 65 companies listed as of the report date, raising a total of $23 billion, with IT, industrials, and discretionary consumption being the top three fundraising sectors. Year-to-date net inflows from Southbound funds totaled $39 billion, with another $500 million recorded this week. On policy and regulation, media reports indicate that China is preparing to invest RMB 2 trillion in building data centers, aligning with the direction of the '15th Five-Year Plan'; additionally, three ministries summoned seven online travel platforms regarding violations related to train tickets.
Analysis framework
The institution employs a multi-dimensional data tracking framework for analysis: first, assessing the strength of economic fundamentals through high-frequency macro indicators (trade, credit, CPI/PPI); second, judging capital preferences by combining market microstructure (sector gains/losses, style factor performance such as value/growth, dividend yields, etc.); finally, deriving medium-to-short-term relative asset performance using proprietary models (e.g., A-H rotation model, policy sentiment proxy indicators). This transmission analysis from macro fundamentals to market microstructure helps investors understand the market implications behind the data.
Methodology notes
Prosperity Turning Point Analysis
The report determines the current position in the economic cycle (e.g., whether inflation has peaked, whether external demand is recovering) by comparing MoM/YoY changes in PPI/CPI, import/export data, and credit expansion. This helps investors identify marginal change points in the macro economy.
A-H Share Rotation Model
The report mentions using an 'A-H rotation model' to predict the excess return (Alpha) or risk-adjusted performance of H-shares relative to A-shares. Such models are typically constructed based on multiple factors including valuation spreads, liquidity, and policy sentiment, helping investors switch between two highly correlated but differently priced markets.
Interpretation of Data Beating Expectations
The report emphasizes that May trade and credit data 'beat expectations'. In efficient markets, stock prices often reflect expectations rather than absolute values, so the deviation (Surprise) between actual data and market expectations is a key driver of short-term market volatility.
Key data
- May Export Growth YoY+19.4%Exceeded market consensus expectations, indicating strong external demand.
- May Import Growth YoY+27.5%Exceeded market consensus expectations, indicating a recovery in domestic demand or restocking needs.
- May PPI YoY+3.9%Growth expanded, primarily driven by the energy sector.
- May Core CPI YoY+1.1%Growth slowed, mainly affected by weakening prices for services such as tourism.
- MSCI China Index Performance This Week-0.9%Dragged down by software and retail sectors.
- CSI 300 Index Performance This Week-0.8%Dragged down by information technology and discretionary consumption.
- HK IPO Fundraising Amount (YTD)$23 Billion65 companies have listed so far this year, indicating high market activity.
- Net Inflow from Southbound Funds (YTD)$39 BillionMainland funds continue to allocate to HK stocks.
Impact & implications
Strong trade and credit data in May indicate that the Chinese economy has shown resilience in both internal and external demand, which may support cyclical sectors (such as materials and industrials). However, the slowdown in core CPI suggests that the recovery in domestic demand remains uneven, and service consumption may face pressure. For investors, the A-H rotation model pointing to relative outperformance of H-shares may imply that HK stocks offer a higher margin of safety or elasticity at current valuation levels. Meanwhile, the activity in HK IPOs and the continuous inflow of Southbound funds reflect the market's long-term allocation interest in high-quality Chinese assets.
What to watch
- Subsequent trends in inflation data, particularly whether core CPI can stabilize and rebound.
- The impact of the Federal Reserve's monetary policy path on global liquidity.
- Changes in geopolitical factors and the barometer of Sino-US relations.
- Flows of Southbound funds via Stock Connect and changes in individual stock holdings.