According to Forbes, China’s earnings season revealed strong Q3 performances with Luxshare increasing net profit by 32% year-over-year and Foxconn Industrial Internet surging 62% YoY. However, Asian equities were mixed as Hong Kong underperformed amid “buy the rumor, sell the news” sentiment following the Trump-Xi trade truce. October’s official manufacturing PMI declined to 49.0 from September’s 49.8, indicating contraction, while non-manufacturing PMI remained at 50.1. Healthcare was the sole positive sector in Hong Kong, with biotech company 3SBio gaining 11.27% and Innovent rising 7.81%, while mainland investors bought $1.11 billion worth of Hong Kong stocks via Southbound Stock Connect. This divergence between corporate performance and economic indicators reveals deeper structural challenges.
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Table of Contents
The Corporate Resilience Narrative
The impressive earnings from Luxshare and Foxconn Industrial Internet demonstrate how China’s manufacturing champions continue to excel despite broader economic pressures. These companies represent the successful transition toward higher-value electronics manufacturing and supply chain integration that has characterized China’s industrial upgrading. Their performance suggests that select Chinese corporations have developed sufficient operational efficiency and global market positioning to withstand both domestic slowdowns and international trade tensions. However, this creates a dangerous narrative where strong corporate earnings mask underlying economic vulnerabilities, potentially delaying necessary policy responses.
The Stimulus Dilemma
The mixed PMI data reveals a critical policy challenge for Chinese authorities. With manufacturing contracting and services barely expanding, the case for stimulus appears strong. Yet the government’s focus on the Five-Year Plan suggests a preference for structural reforms over short-term stimulus. This creates a fundamental tension between immediate economic support and long-term strategic objectives. The Ministry of Finance’s emphasis on “comprehensive domestic demand expansion” and “high-level self-reliance in science and technology” indicates recognition of the problem, but the absence of concrete stimulus measures suggests either political constraints or a deliberate strategy to avoid creating new asset bubbles.
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Trade Truce Realities
The market’s “sell the news” reaction to the Trump-Xi meeting reflects sophisticated understanding of China-US relations beyond headline diplomacy. Institutional investors recognize that trade truces don’t resolve fundamental strategic competition. The continued sidelining of US institutional capital, despite improved rhetoric, indicates deep-seated concerns about geopolitical risk and regulatory uncertainty. This creates a structural limitation on Hong Kong’s market performance, as global capital remains cautious about Chinese assets despite attractive valuations.
Healthcare’s Unexpected Strength
The healthcare sector’s outperformance, particularly in biotech, represents an important diversification story beyond the typical technology narrative. The collaboration between Chinese biotech firms like 3SBio and global pharmaceutical giants demonstrates China’s growing capability in high-value research and development. This sector may represent the next phase of China’s economic transformation—moving from manufacturing prowess to innovation leadership in critical industries. The fact that these gains occurred while broader technology sectors declined suggests investors are beginning to differentiate between various types of “tech” exposure in Chinese markets.
Mainland Investor Behavior
The substantial southbound flows through Stock Connect reveal an important divergence in market perception between domestic and international investors. While foreign capital remains cautious, mainland Chinese investors appear to see value in Hong Kong’s discounted assets. This creates an interesting dynamic where domestic capital could potentially provide a floor for Hong Kong markets even as international capital remains on the sidelines. However, this reliance on domestic buying raises questions about market depth and the sustainability of any recovery without broader international participation.
The Regulatory Transformation
CSRC Chairman Wu Qing’s emphasis on financing science and technology companies signals a strategic pivot in China’s capital markets allocation. Rather than supporting traditional industries, regulators are explicitly channeling capital toward strategic sectors aligned with national technological ambitions. This represents a significant evolution from China’s previous growth model and creates both opportunities and risks. While it may accelerate innovation in targeted sectors, it could also lead to capital misallocation if investment decisions become overly politicized rather than market-driven.
Navigating the Contradictions
The current Chinese market landscape presents investors with multiple contradictions: strong corporate earnings amid economic slowdown, policy rhetoric without immediate action, and domestic confidence contrasting with international caution. This environment requires sophisticated analysis beyond surface-level indicators. The coming weeks will be critical for determining whether current patterns represent temporary dislocation or a more permanent revaluation of Chinese assets. The key watchpoints include concrete stimulus measures, follow-through on trade truce commitments, and whether the manufacturing contraction spreads to services—potentially creating a more comprehensive slowdown that even resilient corporations cannot withstand.
