Is a China stock rally sustainable? Goldman Sachs weighs in :

Chinese stock markets have experienced a remarkable rebound over the past two months, with analysts from Goldman Sachs predicting further gains ahead, particularly under specific conditions.

Both China’s blue-chip Shanghai Shenzhen CSI 300 index and the broader Shanghai Composite index have surged by approximately 16% to 18% from their multi-year lows reached in late January. This resurgence has been fueled by a combination of bargain hunting, optimism surrounding additional stimulus measures from Beijing, and signs of improvement in the world’s second-largest economy.

Goldman Sachs analysts have maintained an Overweight rating on China’s A shares index (CSI 300) and raised their 12-month target for the index to 4,100 points from 3,900 points, suggesting a potential upside of about 11% from current levels. They believe that Chinese markets have the potential for further rallies, especially in the event of a bull market, defined as a 20% increase from recent lows. However, the realization of such gains depends on Chinese companies delivering strong earnings performance.

The future trajectory of Chinese markets will also hinge on the effectiveness of Beijing’s newly announced stimulus measures and the ongoing dynamics of U.S.-China trade tensions in the coming months, according to analysts.

In terms of sectoral outlook, Goldman Sachs analysts are bullish on technology, media, and telecommunications sectors, while maintaining a neutral stance on developers and banks. They have downgraded their outlook on automobiles and capital goods.

However, analysts caution that risks to the Chinese market rally persist, particularly related to potential policy disappointments and ongoing tensions between the U.S. and China. Additionally, the troubled property sector in China remains a source of concern, necessitating consistent government support to spur a recovery. Although Beijing has recently announced significant easing of property market restrictions and direct government support for the sector, investors await further clarity on the implementation of these measures.

One significant uncertainty lies in reports suggesting that Beijing is urging state governments to start purchasing houses to alleviate inventory pressure for major developers, adding another layer of complexity to the market outlook.