Asian Markets Mixed, China and Korea Buck Downward Trend in First Week of 2025 Trading
The first full week of trading in 2025 saw mixed performance across Asian equity markets, with a general downward trend punctuated by gains in Korea and Mainland China. Pakistan and Hong Kong lagged significantly, while other markets like Thailand experienced more positive performance. This follows a mixed global economic backdrop, with persistent concerns about inflation and global growth influencing investor sentiment. The release of the December Caixin Services PMI provided a glimpse of resilience in the Chinese services sector, exceeding expectations and showing an acceleration from November’s figures. The index, a key indicator of China’s economic health, reached 52.2, suggesting continued expansion in the sector despite ongoing economic challenges.
Geopolitical Developments and Market Impacts
Geopolitical developments added another layer of complexity to the market landscape. The US Department of Defense (DOD) added Chinese tech giants CATL and Tencent to its investment blacklist, raising concerns about escalating US-China tensions. The companies, however, have contested the designation, calling it a "mistake" and are actively engaging with the DOD to resolve the issue. Crucially, the DOD’s action, without an accompanying executive order, doesn’t currently impose investment restrictions, mitigating the immediate impact on the companies. Concurrently, President Xi Jinping’s decision to send a high-level delegate to the US presidential inauguration signaled a commitment to maintaining dialogue and potentially easing trade tensions between the world’s two largest economies. This diplomatic move has been interpreted as a positive sign for future US-China relations, potentially fostering a more cooperative environment for trade and investment.
China’s Monetary Policy and Market Dynamics
The People’s Bank of China (PBOC) paused its government bond purchases, a move aimed at stabilizing the Chinese currency, the yuan (CNY), which has been facing downward pressure. This decision comes as the yield on China’s 10-year treasury bond reached new lows, creating a favorable environment for equities. With dividend yields on Mainland stocks exceeding 2% while the 10-year bond yield remains below that threshold, stocks offer a more attractive return, even when compared to the risk-free rate. This dynamic makes equities a more compelling investment option for income-seeking investors. Meanwhile, the opposite scenario is playing out in the US, where the higher 10-year treasury yield (nearly 5%) presents a competitive alternative to equity investments. This divergence in yield dynamics between the US and China could influence cross-border capital flows.
Mainland Investors Boost Hong Kong Market amid Volatility
Mainland Chinese investors demonstrated confidence in the Hong Kong market, injecting over $6 billion in net buying via the Southbound Stock Connect program this week. This substantial inflow signifies their belief in the long-term potential of Hong Kong-listed companies, even as the market experienced volatility. This influx of capital comes on the heels of over $100 billion in net buying from Mainland investors in 2024, more than double the 2023 figures, underscoring the increasing integration and interdependence of the Mainland and Hong Kong markets. Consumer stocks, which have faced recent headwinds despite the expansion of a consumer trade-in subsidy program, were likely targets for bargain-hunting Mainland investors.
Hong Kong Market Performance and IPO Activity
The Hong Kong stock market experienced a decline this week, with both the Hang Seng Index and the Hang Seng Tech Index falling. Trading volume, however, saw a significant increase, suggesting heightened market activity. The market breadth, as reflected in the ratio of advancing to declining stocks, indicated a broad-based decline. Sector performance was mixed, with Materials showing resilience while Consumer Staples, Utilities, and Consumer Discretionary were among the worst performers. The successful IPO of toy company Bloks Group, which surged 40%, points to renewed optimism about the Hong Kong IPO market, anticipating increased activity in 2025.
Mainland China Market Performance and Economic Indicators
Mainland China markets also experienced a downturn, with all major indices – Shanghai, Shenzhen, and the STAR Board – closing lower. Trading volume increased modestly. Similar to Hong Kong, the market saw a broad-based decline, with significantly more declining stocks than advancing ones. Sector performance was generally negative, with Materials and Energy showing relative strength while Information Technology, Communication Services, and Real Estate lagged. A few subsectors, including precious metals and soft drinks, bucked the trend and posted gains. The performance of key economic indicators, like the CNY exchange rate, copper and steel prices, and bond yields, provided further context for the market’s performance. These market movements occurred against the backdrop of ongoing efforts by Chinese authorities to stimulate economic growth while managing currency fluctuations.
