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Goldman Sachs Analyzes Sustainability of China’s Stock Market Rally

Chinese stock markets have experienced a significant rebound over the past two months, and Goldman Sachs analysts predict that this upward trend could continue, provided certain key conditions are met.

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The Shanghai Shenzhen CSI 300 index and the broader Shanghai Composite index have both risen between 16% to 18% from the multi-year lows reached in late January. This recovery has been fueled by bargain hunting, optimism regarding additional stimulus measures from Beijing, and signs of improvement in the world’s second-largest economy.

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Goldman Sachs remains bullish on China’s A shares index (CSI 300), increasing their 12-month target for the index to 4,100 points from 3,900 points. This adjustment implies an upside of about 11% from current levels.

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The analysts at Goldman Sachs believe Chinese markets have the potential for further gains, particularly if historical trends during bull markets—a 20% rise from recent lows—hold true. However, sustained growth hinges on Chinese companies delivering robust earnings.

The continuation of the rally will also depend on Beijing’s effective implementation of its recently announced stimulus measures and the evolution of U.S.-China trade tensions. Sector-wise, Goldman Sachs is optimistic about technology, media, and telecommunications, maintains a neutral stance on developers and banks, and has downgraded its outlook on automobiles and capital goods.

Despite the optimistic forecast, Goldman Sachs acknowledges several risks that could jeopardize the rally. Chief among these are potential disappointments in policy implementation and ongoing Sino-U.S. trade disputes. The beleaguered property sector in China also poses a significant risk, necessitating continuous government support to foster a recovery. Although Beijing has recently introduced substantial property market reforms and direct support, investors are looking for more detailed plans on the execution of these measures.

A particular point of uncertainty involves reports suggesting that Beijing may instruct state governments to purchase homes to help reduce inventory for major developers, which could significantly impact market dynamics.

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