After a retaliatory rise at the end of September and high volatility in the fourth quarter last year, the market weakened significantly around New Year's Day. The transformation of old and new economic momentum and the uncertainty of the external environment have made investors worried. Considering the reduced pressure of the real estate cycle, government fiscal and monetary policy supports, and the valuation advantage of A-shares, despite of the weaken market at the beginning of 2025, there is little room for further decline. It now looks like the season switch period when spring is finding its foothold at the end of winter. And we must be optimistic at this time.
The property market that has dragged down the economy the most over the past three years have eased. In the past three years, the sales of new homes have dropped from 1.8 billion square meters in 2021 to 900 million square meters in 2024, which is 50% off over three years. As a result, the decline in property investment and the impact on upstream and downstream industries were the biggest pressures on China's economy. 2024Q4 New home sales turned to positive YoY after more than three years of decline. New home sales are expected to stabilize in 2025, easing the biggest pressure on China's economy in the past three years. At the same time, the proportion of property industry and its upstream and downstream industries in terms of GDP percentage has declined, while the proportion of digital economy, green energy, artificial intelligence, high-end equipment, and service industries has increased. The transformation of old and new economy drivers has been on the track, and consumer confidence and business expectations will start to improve.
The macro policy will be more accommodative, which will be inclined to support the stock market. The Politburo meeting held on 9th December called for "strengthening unconventional countercyclical adjustments" and "implementing a more active fiscal policy" and "moderately loose monetary policy." These references are very rare. The last time when a moderately loose monetary policy was mentioned in 2008 (Aisa financial crisis). It shows the determination of the central authorities. The reference to the stock market is "to stabilize the property market and the stock market". Combined with the wording of the Politburo meeting on 26th September 2024 to "strive to boost the capital market", the policies will be strong to support the economy and the stock market. It is foreseeable that the fiscal deficit ratio will be further increased in 2025, and the issuance of ultra-long-term treasury bonds will be increased. Together with the recent issuance of 6 trillion RMB special government bonds, such a dovish market environment has not been seen for many years.
The risk-free rate is declining rapidly, highlighting the investment opportunity for the stock market. The yield on 10-year Treasury bonds fell from 2.1% to 1.6% in just over a month due to loosen monetary conditions, which means if you invest for 10 years, you can only earn 1.6% interest per year. China's residential rental return has been low, and the average annual rental return in Beijing, Shanghai, Guangzhou and Shenzhen is 1.7%. However, it's now higher than the 10-year Treasury yield. At present, the dividend yield of the CSI 300 index is 3.4%, and the dividend alone is twice the yield of 10-year Treasury bonds. The CSI 300 has a P/E ratio of 12.4 times, and its reciprocal is 8.06% (E/P ratio). Comparing to the U.S. market, where the 10-year Treasury bond yield is currently 4.6%, and the S&P 500 is trading at 28.7 times, with E/P ratio at 3.4%.
In comparison to 2018, China has more tools to deal with the tariff barriers and technology restrictions that are expected to be enforced by upcoming Trump administration. Many investors are worried about whether the trauma of stock market in 2018 (the US-China trade conflict causing CSI300 declined 25%) will happen again in 2025. Unlike seven years ago, China has expanded the proportion of exports to ASEAN, Russia and South America, meanwhile the proportion of exports to the United States has dropped from 19% to 14%, which means export dependence on the United States is decreasing. At the same time, China's exports have increased by 60% since the US imposed tariffs in 2018 and are expected to reach 25 trillion RMB in 2024. Export product structure has continued being optimized. In addition to countermeasures such as tariffs and restrictions on the export of key products and technologies, boosting domestic demand is also a key response for China. At the Central Economic Work Conference in December last year, boosting consumption was placed as the top priority. This is the first time that consumption has been placed in such an important position. Consumption growth is expected to pick up under the relief of real estate pressure and large-scale consumption stimulus policies.
We will continue to see the transformation of old and new economic momentum in 2025, also facing the uncertainty of the external environment. With the easing of market funds, we will still in the process of restoring market confidence. We believe that the risk appetite of the market will be higher than in 2024. No need to guess whether it will be a bull market or not, the market is more likely to keep vigorous.
In 2025, we have made allocations in three directions, large blue-chips, technology growth and small-cap stocks. Large blue-chips have the characteristics of stable profitability, industry leader, high dividends and low valuation. In the process of rapid decline of risk-free rate, its investment value is attractive. It includes banks, home appliances, automobiles, liquor, Internet platforms. Since 24th September, tech growth and small-cap stocks have performed strongly. We believe this trend will continue in 2025 as the risk appetite increases. Technology growth includes industries or themes such as AI, robotics, semiconductors, low-altitude economy, and consumer electronics. Small-cap stocks, although volatile, have provided good rotational returns, and we continue to retain some positions, with a more diversified sectors and holdings. Overall, the stock allocation is more balanced. It retains the traditional large blue-chip direction, but also the technology growth and small-caps strategies we have developed in recent years.