Broker: CGS International
Date of Report: July 21, 2025

China’s Twin Market Tailwinds: Anti-Involution Policy and US-China Trade Thaw Set Stage for Equity Rally

Introduction: Navigating a New Era for China Equities

China’s financial markets are positioned at a turning point, supported by decisive regulatory actions to curb “involution-style” competition and a promising thaw in US-China trade relations. This dual momentum is expected to boost investor confidence, drive risk appetite, and create a favorable backdrop for both A-share and H-share performance. CGS International’s latest strategy note provides a comprehensive outlook on these trends, detailing sector impacts and high-conviction stock picks.

Policy Shift: Anti-Involution Actions Target Disorderly Competition

Recent signals from Chinese policymakers underscore a major drive to address damaging, low-price, disorderly competition—coined “involution”—across key sectors:

• Central Financial and Economic Affairs Commission: In July 2025, a high-level meeting led by Xi Jinping called for tighter regulation on low-price competition and a push to phase out outdated capacity, focusing on product quality and market order.
• Sectoral Focus: The government is preparing work plans for ten major industries, including steel, non-ferrous metals, petrochemicals, and building materials, seeking to optimize supply and prevent redundant investments, especially in emerging industries like AI, computing power, and new-energy vehicles.
• Broader Scope than Past Reforms: Unlike the 2015-18 supply-side reforms, today’s involution challenge spans a wider array of industries, many dominated by non-state-owned enterprises. The shift represents a structural effort to realign supply and demand, and injects long-term confidence into the market outlook.

Geopolitical Tailwind: US-China Trade Détente Boosts Market Sentiment

A series of high-profile developments in July 2025 have further strengthened the near-term outlook for Chinese equities:

• AI Chip Approvals: The US government’s greenlight for Nvidia’s H20 and AMD’s MI308 AI chips to be sold in China marked a significant trade gesture, seen as a move to de-escalate tensions.
• Rare-Earth Exports: China reciprocated by ramping up rare-earth mineral exports to the US by 660% month-on-month in June 2025, underscoring the mutual willingness to negotiate.
• Tariff Negotiations: Flexibility around the August 2025 US-China tariff deadline, coupled with high-level diplomatic engagement, signals that the risk of new tariff hikes remains low in the near-term.

These positive signals are expected to persist for several months, supporting equity market performance.

Market Implications: Twin Tailwinds Set Stage for Broad-Based Gains

The convergence of regulatory and geopolitical tailwinds is anticipated to:

• Enhance risk appetite among investors.
• Broaden gains to upstream cyclical sectors as capacity optimization measures take effect.
• Narrow the year-to-date performance gap between H-shares and A-shares, with A-shares being particularly sensitive to policy-driven improvements.

CGS International maintains its end-2025 index target for the Hang Seng at 26,300.

High Conviction Stock Picks: Detailed Company Analysis

Below is the list of CGS International’s top China equity picks, with detailed metrics and sector commentary:

Sector-by-Sector: Key Anti-Involution Actions and Industry Highlights

• Automotive: Chinese carmakers pledged timely payments to suppliers and curbed price wars to stabilize profitability and supply chains. Regulators are enforcing stricter product safety standards and regulating market order in the new energy vehicle (NEV) sector, including enhanced cost surveys and price monitoring.
• Solar Photovoltaics: Government guidance aims to manage excess capacity and eliminate outdated production. Leading polysilicon producers are forming a joint entity to acquire struggling rivals, realign production, and reduce price wars.
• Solar Glass: Producers plan to cut output by up to 30% due to overcapacity and weakening demand, far exceeding earlier reductions.
• Construction: Thirty-three firms have joined an ‘Anti-Involution Competition’ initiative to maintain fair competition and a healthy ecosystem.
• Iron & Steel: Local authorities mandated temporary capacity cuts. June crude steel production dropped 9.2% year-on-year, the largest in 10 months, with first-half output at its weakest since 2020.
• Cement: The industry is focusing on capacity replacement policies to optimize structure and drive transformation.
• Coal: The government stressed the need to address supply-demand mismatches and curb involution-style competition through improved contract discipline and long-term obligations.
• Food Delivery & E-Commerce: Regulators summoned Meituan, JD.com, and Ele.me, demanding rational promotional practices and healthier competition to benefit all stakeholders.

Conclusion: Outlook and Strategic Positioning

With structural policy reforms targeting disorderly competition and a notable US-China trade détente, China’s equity markets are poised for a period of improved sentiment and performance. Investors are advised to monitor sectoral developments closely, as the anti-involution campaign is set to reshape competitive dynamics and drive value in upstream cyclical sectors. The Hang Seng Index target remains at 26,300 for end-2025, with high conviction picks spanning technology, automotive, financials, and healthcare.

Stock Ratings Summary

• Add: Expected total return exceeds 10% over the next 12 months.
• Hold: Expected total return between 0% and 10%.
• Reduce: Expected negative total return.

Rating Distribution (as of June 30, 2025)

• Add: 70.6%
• Hold: 20.5%
• Reduce: 8.9%

561 companies under coverage for the quarter ended June 30, 2025.

Final Thoughts

As China navigates a new policy regime and enjoys a temporary respite in US-China tensions, select equities—especially those aligned with regulatory priorities and capacity optimization—offer compelling risk-reward opportunities for discerning investors.