{"content":"The US presidential election is scheduled to take place on November 5. The n\nbuild-up to and the outcomes of the election will be consequential to asset markets globally, US-China relations, and the returns of Chinese equities.\nIn 2020, we developed a US-China Relations Barometer (GSSRUSCN) to n\nquantify the extent of the bilateral frictions embedded in equity valuations across four strategic cohorts—Trade, Technology, Capital Markets, and Geopolitics. So\nfar, the barometer has correlated well with the US-China events timeline, and China equity performance. As the dynamics and tensions in the relationship evolve, we refresh the underlying constituents of all existing equity proxies, notably Chinese exporters to the US, and we incorporate new variables relating to the “new three products”, AI, and Biotech into the barometer to better assess market risk/reward.\nThe revised barometer is at 53 (on a scale of 0 to 100), down from ~70 before n\nPresidents Biden and Xi met in San Francisco, helped by the lower implied tensions from Geopolitics and Capital Markets. It also suggests that listed China TMT might not be as sensitive to US-China risks as before but both “Hard” and “Soft” tech, and A-share small/mid caps could be vulnerable if the frictions re-escalate. Leveraging this framework, we introduce two stock lists—US-China Tensions Outperformers and Underperformers—for investors to express their active views on this market driver.\nExhibit 1: Market-implied US-China tensions have eased over the past year\n0%\n10%\n20%\n30%\n40%\n50%\n60%\n70%\n80%\n90%\n100%\nJan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24\nRussiaUkraine War The Balloon Incident\nSF XiBiden Meeting\nGS US-China Relations Barometer \u003cGSSRUSCN\u003e\nUS imposed 7-year components ban on ZTE\n25% tariffs on US$34bn of Chinese imports implemented\n25% tariffs on US$16bn of Chinese goods implemented\nUS and China agreed on a 90-day halt to new tariffs\nHuawei was added to the Entity List\nPhase One Trade Deal\nThe Hong Kong National Security Law was passed\nNancy Pelosi visited Taiwan\nTaiwan Election\nThe House passed the HFCAA\nUS Election\nSEC finalized rules implementing the submission and disclosure in HFCAA\nBali XiBiden Meeting\nTrade negotiation break down\nHigher implies \"worse relations\"\nSource: Goldman Sachs Global Investment Research\nKinger Lau, CFA +852-2978-1224 | kinger.lau@gs.com Goldman Sachs (Asia) L.L.C.\nTimothy Moe, CFA +65-6889-1199 | timothy.moe@gs.com Goldman Sachs (Singapore) Pte\nSi Fu, Ph.D. +852-2978-0200 | si.fu@gs.com Goldman Sachs (Asia) L.L.C.\nKevin Wang, CFA +852-2978-2446 | kevin.wang@gs.com Goldman Sachs (Asia) L.L.C.\nChina Strategy Deciphering US-China risks ahead of the US Presidential election\n14 March 2024 | 3:31PM HKT\nInvestors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.\nfd1822e448f54f98a6011f57e79f4c98\n\nUS presidential election and US-China relations montage\nExhibit 2: Trump and Biden are expected by the prediction market to be presidential candidates in the upcoming election\nExhibit 3: US-China relations are once again in focus as the US presidential election approaches\n81%\n19%\n76%\n24%\n48% 50% 46% 44%\n0% 10% 20% 30% 40% 50% 60% 70% 80% 90%\nTrump\nAll others\nBiden\nAll others\nRepublican\nDemocrat\nTrump\nBiden\nRepublican nomination Democratic nomination Election victory Polling\nPrediction Market Probability of Primary and General Election Outcomes\n0 10 20 30 40 50 60 70 80 90 100\nMar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 Jan-24 Feb-24\nNews Index on US Election and China\nBars show No. of news articles with key words: (US election and China) or (美国大选 and 中国) in their titles or leading paragraphs.\nIndex (range\nPrediction market result as of of Mar 9; Polling as of Mar 10\nSource: PredictIt, FiveThirtyEight, Data compiled by Goldman Sachs Global Investment Research\nSource: Factiva, Goldman Sachs Global Investment Research\nExhibit 4: Few Chinese companies were listed in the US markets over the past two years\nExhibit 5: US ownership in Chinese equities has fallen over the past few years\n0\n5\n10\n15\n20\n25\n30\n35\n0\n5\n10\n15\n20\n25\n30\n2010\n2011\n2012\n2013\n2014\n2015\n2016\n2017\n2018\n2019\n2020\n2021\n2022\n2023\nCapital raised (US$bn) No. of IPOs - RHS\nIPOs of Chinese Companies in the US\n1,239\n1,053\n829 793 714 588 590\n3.5%\n4.0%\n4.5%\n5.0%\n5.5%\n6.0%\n6.5%\n7.0%\n0\n200\n400\n600\n800\n1000\n1200\n1400\nJan-21 Jun-21 Jun-22 Dec-22 Jun-23 Nov-23 Jan-24\n(US$bn) US institutional ownership in Chinese Equities (A+H+ADR)\nHolding value\nAs % of listed mkt cap - RHS\nSource: Bloomberg, Goldman Sachs Global Investment Research\nSource: Bloomberg, Goldman Sachs Global Investment Research\nExhibit 6: Import tariffs on Chinese exports to the US have risen meaningfully over the past few years\nExhibit 7: Chinese stocks typically trade moderately better vis-a-vis other EM equity markets when Republican candidates came out on top in US presidential elections\n17.2%\n10.6%\n0%\n2%\n4%\n6%\n8%\n10%\n12%\n14%\n16%\n18%\n20%\n2015 2016 2017 2018 2019 2020 2021 2022 2023\nAggregate tariff (of products subject to tariffs)\nAggregate tariff (of all products)\nU.S. Aggregate Tariffs on Chinese Goods\n-60%\n-40%\n-20%\n0%\n20%\n40%\n60%\n80%\nFirst-Year Full Period First-Year Full Period\nMSCI China MSCI China rel. EM\nRepublican Democratic\nMedian Return of MXCN under Different US Administration\nNote: Based on 7 episodes from year-end 1992 to year-end 2020, prior to the current administration; returns are in USD terms\nSource: US International Trade Commission, Data compiled by Goldman Sachs Global Investment Research\nSource: FactSet, MSCI, Goldman Sachs Global Investment Research\n14 March 2024 2\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\nExhibit 8: US-China frictions are multi-faceted\nCategory Date Action Source\nTrade 2018-04-16 The US government banned sales by American companies to China's ZTE Corp South China Morning Post\nTrade 2018-06-15 The US said that 25% levies on $34 billion of Chinese imports would go into effect July 6, and announces 25% tariffs on an additional $16 billion of goods. China responded with tariffs on $34 billion of US goods Reuters\nTrade 2018-12-01 The US and China agreed on a 90-day halt to new tariffs. President Trump agreed to postpone the increase on $200 billion of Chinese goods; the White House said China would buy a \"very substantial\" amount of US products Reuters\nTrade 2019-04-30 US and Chinese negotiators held mid-week trade talks in Beijing, crafted a 150-page draft trade agreement Reuters\nTrade 2019-05-03 In a late-night cable to Washington, Beijing backtracked on almost all aspects of the draft trade pact Reuters\nTrade 2019-05-10 After trade negotiations broke down, the US increased tariffs on US$200 billion worth of Chinese goods from 10 percent to 25 percent\nSouth China Morning Post\nTrade 2019-05-15 US Department of Commerce announced the addition of Huawei Technologies Co. to its “entity list”, which effectively baned US companies from selling to the Chinese telecommunications company without approval\nSouth China Morning Post\nTrade 2019-06-18 President Trump and President Xi agreed by phone to rekindle trade talks Reuters\nTrade 2019-06-29 At the G20 meeting in Osaka, President Trump agreed to no new tariffs and to ease restrictions on Huawei. President Xi agreed to unspecified new purchases of US farm products Reuters\nTrade 2019-08-01 President Trump announced 10% tariffs on $300 billion worth of Chinese imports, after two days of talks with no progress Reuters\nTrade 2019-08-05 China halted purchases of US agricultural products, and the Chinese yuan weakened past the key seven per dollar level Reuters\nTrade 2019-10-11 President Trump said his negotiators have reached a “substantial phase-one deal” that would delay the implementation of more US tariffs on Chinese imports after two days of high-level trade negotiations\nSouth China Morning Post\nCapital Markets 2020-05-20 The Senate approved the Holding Foreign Companies Accountable Act (HFCAA) that provides a process to delist companies from US exchanges if they fail to meet the SEC's auditing requirements Bloomberg\nCapital Markets 2020-12-02 The House passed the Holding Foreign Companies Accountable Act (HFCAA) and sent it to President Trump to sign The US Congress\nCapital Markets 2021-11-25 The CSRC said that Chinese authorities were working with the US counterparts to prevent Chinese companies being delisted from US stock exchanges Reuters\nCapital Markets 2021-12-02 The SEC finalized rules implementing the submission and disclosure requirements in HFCAA SEC\nCapital Markets 2021-12-03 Didi announced that it would start the delisting process from the NYSE and pursue HK listing Didi\nCapital Markets 2022-03-30 The CSRC held a virtual meeting with some US-listed Chinese companies to address key concerns on ADR delisting (Mar 27) China Securities Journal\nGeopolitics 2022-08-02 US House Speaker Nancy Pelosi arrived in Taiwan on a trip she said shows an unwavering American commitment to the Chinese-claimed self-ruled island Reuters\nCapital Markets 2022-08-26 US and China securities regulators reached agreement on auditing of US-listed Chinese firms CSRC, MoF, PCAOB\nHard Tech 2022-10-07 The Bureau of Industry and Security (BIS) implemented new export controls on advanced computing and semiconductors to China\nThe US Department of Commerce\nGeopolitics 2022-11-14 President Biden met with President Xi in Bali, Indonesia The White House\nCapital Markets 2022-12-15 The PCAOB announced that it has successfully gained complete access to investigate audit firms in mainland China and Hong Kong for the first time in history PCAOB\nGeopolitics 2023-01-28 A Chinese balloon drifted into American territory, entering Alaskan airspace The New York Times\nHard Tech 2023-04-20 President Biden may sign an executive order in the coming weeks to limit US investments into semiconductors, artificial intelligence, and quantum computing in China, according to people familiar with the matter Bloomberg\nTechnology 2023-08-09 President Biden issued Executive Order addressing United States investments in certain national security technologies and products in countries of concern\nUS Department of the treasury\nGeopolitics 2023-11-15 President Biden held a Summit with President Xi in Woodside, California The White House\nSoft Tech 2024-03-06 The US Senate's homeland security committee voted on Wednesday to move forward a bill that could restrict business with Chinese biotech companies like BGI and WuXi Apptec Reuters\nSource: News Source, Data compiled by Goldman Sachs Global Investment Research\n14 March 2024 3\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\n\nRecalibrating US-China risks in Chinese equities\nUS-China relations have been under the spotlight since the ‘Trade War’ began in n\n2018, and arguably has been one of the most influential factors driving Chinese equity returns over the past 6 years.\nIn 2020, we introduced a proprietary indicator (Bloomberg ticker: GSSRUSCN) n\nwhich helps us quantify the extent to which the bilateral frictions are discounted in equity prices based on 15 equity proxies across 4 strategic cohorts — Trade, Technology, Capital Markets, and Geopolitics.\nIn a nutshell, we deliberately select equity sectors, portfolios, or individual names n\nthat relate to each of the four cohorts where bilateral tensions have been most pronounced. We then match the chosen proxies with specific benchmarks with the objective of stripping out the US-China factor in their returns profile. We then run a Principal Component Analysis (PCA) to extract the common denominator from the\ndata series, and we take the aggregated first Principal Component as our estimated market-implied US-China risks. In sum, a larger value indicates higher concerns embedded in equity valuations, and vice versa.\nWhile the barometer has served us well analytically in the past 4 years, the n\nevolving nature of the dynamics in US-China relations, the potentially expanding scope of frictional areas, as highlighted in the 150 policy recommendations by the House Select Committee on the Strategic Competition between the US and the CCP late last year, and the likely hawkish campaign rhetoric towards China in the lead-up to the US presidential election, motivate us to update the model inputs and methodology as necessary. Specifically, we now add the following proxies to better comprehend the bilateral tensions:\nChinese exporters to the US: As the domestic economy slows, Chinese a.\ncompanies are actively exploring revenue opportunities abroad, as evidenced by the 4pp increase of overseas revenue representation over the past decade. Indeed, “Going Global” is a theme that could be a major source of potential alpha in the years to come, in our view. However, considering the comments from former President Trump about potentially hiking tariffs for Chinese imports, merchandising trade could once again be a key manifestation of the bilateral frictions ahead of the election. On top of trade proxies that we considered previously, we screen for the top 20 listed companies with the highest direct (or indirect) revenue exposures to the US to form our Chinese exporters portfolio to the US and add it as a new input in the Trade category.\nThe “new three products”, namely new energy vehicle (NEV), renewable b.\nenergy, and EV/lithium battery have collectively been the incremental growth contributors to corporate capex, exports, and the broader Chinese economy. For instance, China overtook Japan as the largest autos exporter in the world in 2023 (5.2mn), with EVs accounting for 34% of total shipments. Not only are Chinese companies in these New Economy sectors selling more into the rest of the world, they are also building out their manufacturing capacity in both\n14 March 2024 4\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\n\nDM and EM economies as the global supply chain reorganization gets underway, driven by policy incentives (e.g. the Inflation Reduction Act in the US), and other logistical and geopolitical considerations. In this regard, leading Chinese players in the EV and renewables supply chains could be subject to disproportionately high scrutiny from US policymakers should their concerns over domestic growth and national security intensify.\nArtificial Intelligence: It has been widely embraced by market participants c.\nthat AI-related technologies and applications are developing into a disruptive and transformative force that could materially impact global growth and how we live in the years to come. This is also a topical investment theme in the equity space where our US and AEJ AI baskets have rallied 109% and 39% since ChatGPT was officially launched on November 30, 2022, compared to 25% for S\u0026P 500 and 5% for MXAPJ. Given the importance to growth, national security, and other social aspects, AI developments, investments, and accessibility have become strategic priorities for many authorities globally.\nIndeed, a number of AI-related restrictions have been put in place by the US on China, encompassing export controls on advanced technologies (e.g. AI chips and semiconductor equipment), FDI and portfolio investment curbs (e.g. reverse CFIUS), and various restriction and sanction lists on specific Chinese names. We quantify the AI-related tensions via the relative returns profile between AI-concept names in China and those listed on other regional bourses in Asia, notably Korea and Taiwan.\nBioTech: On January 25, the House Select Committee introduced a draft d.\nversion of the “BIOSECURE Act” bill in the US House of Representatives. A subsequent, similar bill was proposed in the US Senate last week. The bill is aimed at restricting federally funded medical providers from using foreign adversary biotech companies of concern—where several Chinese CDMO and genomics companies were specifically highlighted. The bill would require congressional approval and will likely be subject to revisions before it becomes law. We highlight that the bills are still in the early stages of the legislative process, with significant uncertainties around the final drafts, and we take no view on their final form or the likelihood of them becoming law. Before this bill was introduced, several Chinese healthcare companies were also added to the Unverified List (UVL). We compile a list of 148 major Chinese healthcare companies across the CDMO, pharmaceuticals, medical device, biotechnology, and diagnostic sub-sectors in both A shares and the offshore market to create our China biotech portfolio to help monitor and measure the impacts of US policy on this industry.\nOffshore-focused Chinese brokers: While the broad Chinese ADR delisting e.\nrisk is largely behind us, capital raising activity from Chinese companies in the US in 2023 was only 2% of the annual total in 2021. Recent news reports also suggest that the regulatory hurdles for China-linked companies to list in the US remain high. Therefore, Chinese brokers that specialize in overseas markets in terms of outbound financing and trading (vs. their domestic A-share-focused peers) could serve as a yardstick of the vibrancy of portfolio\n14 March 2024 5\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\n\nflows and financial market connectivity between the two countries.\nBesides refining our equity proxies, we have also made several modeling n\nadjustments to the barometer as follows:\nPrior to the revision, the barometer has been operating in a tight range (80 to o\n100) since mid-2021, exhibiting relatively low volatility compared to the 2018-2020 period. The “flat” readings, in our view, could be attributable to the trended outperformance of US equities vs. China since early 2021, which in turn has dominated/overridden the US-China factor of our chosen proxies. As such, we have replaced a number of US equity benchmarks with China- or regional-oriented ones to better distill the US-China beta from the inputs.\nThe declining volatility could also be explained by the non-stationary nature o\nof the factor loadings in our equity proxies. For example, investor focus on Trade was pronounced in 2018/2019 but Technology and Capital markets have come to the fore in the past few years, whereas Geopolitics was often a\ncatalyst for sporadic and significant market volatility when key political events regarding Taiwan took place. To address this modeling issue, we scale the importance of the cohorts (i.e. their weights in the barometer) by their relative news counts based on more than 16 million corresponding online news articles since 2018 (see Appendix for detail). In the same vein, we reorganize our equity proxies under “Hard” and “Soft” Tech to better capture their asynchronous return profile and sensitivity with respect to US policy risks in our framework.\nThe revisions also require us to retroactively adjust the historical readings o\nfor the sake of data consistency and comparability. Instead of chain-linking the two barometers at some specific points, we believe it is more analytically robust to completely replace the old barometer with the refined one from the beginning, but adjusting the weights of the proxies per our news counts to ensure their historical relevance.\n14 March 2024 6\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\nExhibit 9: We incorporate new proxies into our barometer to better capture US-China risks embedded in prevailing equity prices\nBolded proxies are new/refreshed proxies.\nSource: Goldman Sachs Global Investment Research\nExhibit 10: We have added equity proxies to better analyze US-China risks embedded in Chinese stocks’ prices\nCategory Proxy Benchmark When Tension Increases\nPerformance Data Used in PCA?\nValuation Data Used in PCA?\nPC1 Explanatory Power in PCA\nUS Companies with Mainland China Sales Exposures S\u0026P500 Underperform Y\nChinese Companies with High US Sales Exposures\nChinese Companies with Low US Sales Exposures Underperform Y\nChinese EV and Renewable Supply Chain MSCI China Underperform Y\nChinese Huawei Suppliers MSCI China Underperform Y\nChinese Apple Suppliers MSCI China Underperform Y\nChinese Semiconductors MSCI China Underperform Y\nChinese Internet MSCI China Underperform Y\nChinese Artificial Intelligence MSCI China Underperform Y\nChinese Biotechnology MSCI China Underperform Y\nMSCI Overseas China (MXOCN) MSCI China Underperform Y\nDual-Listed ADR Non-Dual Listed ADRs Outperform Y\nHong Kong Stock Exchange MSCI Hong Kong Outperform Y\nADRs with High US Ownership* ADRs with Low US Ownership Underperform Y Y\nOverseas Brokers Domestic Brokers Underperform Y\nCSI Defense CSI300 Outperform Y Y\nTaiwan Defense Stocks Asia Pacific ex-JP Regional Defense** Outperform Y\nMainland China-exposed Taiwan Stocks MSCI Taiwan Underperform Y\nNote (1): We took out soybean, LNG, and rare earth names and added high US sales exposures and EV and renewable supply chain names in trade proxy Note (2): The original \"Technology\" category is now \"Hard Technology\" Note (3): We added a \"Soft Technology\" category which includes internet, artificial intelligence, and biotechnology stocks Note (4): We removed MSCI Overseas China (MXOCN) vs. H-Shares sector peer and RMB Depreciation Winners vs. Losers and added High vs. Low US Concentration and Overseas vs. Domestic Brokers in the capital market proxy Note (5): *Among ADRs with market value \u003eUS$500mn, ADRs with the top 50% of U.S. in institutional investors and retail investors are classified as \"High US Ownership\" Note (6): We changed MSCI Aerospace \u0026 Defense to CSI Defense in the geopolitics category and added Taiwan defense names; HSBC + Standard Chartered and Externally vs. Domestically exposed HK Stocks were removed Note (7): **Does not include Taiwan and CSI Defense names Note (8): Universe is all Chinese companies (A+H+ADR)\nTrade\nCapital Markets\nGeopolitics\n63%\n54%\n46%\nHard Technology\nSoft Technology\n54%\n49%\nSource: Goldman Sachs Global Investment Research\n14 March 2024 7\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\nExhibit 11: Prior to the revisions, our barometer has exhibited relatively low volatility since 2021\nExhibit 12: Investor focus on US-China risks is probably dynamic in nature, as supported by our online news scripting analysis\n0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%\nDec-17\nMar-18\nJun-18\nSep-18\nDec-18\nMar-19\nJun-19\nSep-19\nDec-19\nMar-20\nJun-20\nSep-20\nDec-20\nMar-21\nJun-21\nSep-21\nDec-21\nGSSRUSCN (NEW) GSSRUSCN (OLD)\nUS-China Relations Barometer\nindicates higher implied tensions 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%\nJan-18\nJan-19\nJan-20\nJan-21\nJan-22\nJan-23\nJan-24\nGeopolitics\nCapital Mkt\nSoft Tech\nHard Tech\nTrade\nProxy Weight based on Relative News Mentions\nNote: The maximum weight is capped at 30%\nSource: Bloomberg, Goldman Sachs Global Investment Research\nSource: Factiva, Goldman Sachs Global Investment Research\n14 March 2024 8\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\n\nChanging market impacts as US-China relations evolve\nThe revised barometer is currently at 53 (on a scale of 0 to 100), suggesting that the n\nmarket-implied concerns about US-China relations are at the high-end of the historical range. However, compared to the stressed points in late 2018, 2019, and the more recent peak in January 2023, a somewhat benign US-China relations outlook appears to have been factored into the price, all else being equal.\nAmong the five key cohorts, our work shows that the moderation in US-China risks n\nin the past 12 months could be driven by the perceived easing tensions in Capital Markets and Geopolitics, while the uncertainty residing in Trade and “Soft” Tech has remained elevated. Specifically, key observations and market implications are:\nWhile geopolitical issues still feature heavily in our recent client conversations, a.\nthe market has been increasingly pricing out the left-tail scenarios since late last year, probably helped by the in-person meeting between Presidents\nXi and Biden last November at the APEC Summit, and the subsequent renewal in dialogue and engagement between the two governments;\nMarket focus on trade-related issues has spiked in the past 2 months, likely b.\nreflecting the rising concerns about tariff risks, the uncertainty revolving around “De minimis” imports from China to the US, and to a lesser extent, the operating and business conditions of US companies in China;\nImplied tensions in “Hard Tech” have been well anchored for an extended c.\nperiod as the policy restrictions (and direction) there seem well-understood and discounted by investors. However, the risks in “Soft Tech” have moved higher in recent months, in our view likely driven by the market volatility stemming from the proposed BioSecure Act bill and the expanding/intensifying restrictions on AI and other advanced technologies;\nThe implied tensions for Capital Markets were reset lower after the on-site d.\naudit inspection by the SEC in Hong Kong in Dec 2022, which cleared the uncertainty about broad Chinese ADR delisting from US exchanges. No\nChinese ADRs have been added to the Commission-Identified Issuer (CII) list under the HFCAA in the past 12 months, and the period of concentrated selling pressures from US investors is probably over, in our view, given their light allocation to China at present.\nAt the market and index levels, offshore equities were generally more n\nunfavorably linked with rising US-China tensions than A-shares before the revision of the barometer, likely resulting from the former’s higher foreign investor ownership, tighter liquidity linkages to the US, and direct exposures to ADR delisting risks. However, the revised barometer indicates that the sensitivity profile has reversed in the past few years, with A-share benchmarks, especially onshore small/mid caps, now exhibiting stronger US-China betas relative to key offshore indices. The shifts could be explained by: (a) a prolonged and more significant de-rating of H vs. A since 2021; (b) the offshore market is trading at meaningfully lower valuations than A-shares in absolute terms and vs. historical\n14 March 2024 9\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\n\nranges; (c) US policy risks targeting ADRs and China Internet, which accounts for 37% of MSCI China market cap, are much better understood by investors now; and, (d) “Hard” and “Soft” tech companies are better represented in A-shares, particularly in the small/mid cap universe.\nIn a similar vein, sectorally, we note that Consumer sectors, including Consumer n\nTech, tend to outperform when the implied tensions escalate and vice versa for Capital Goods, Tech Hardware, Semiconductors, and other Cyclicals, reflecting a defensive tilt and domestic-demand orientation when external uncertainty rises and/or investor risk appetite falters.\nExhibit 13: Market-implied US-China tensions have eased somewhat in recent months\n0%\n10%\n20%\n30%\n40%\n50%\n60%\n70%\n80%\n90%\n100%\nJan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24\nRussiaUkraine War The Balloon Incident\nSF XiBiden Meeting\nGS US-China Relations Barometer \u003cGSSRUSCN\u003e\nUS imposed 7-year components ban on ZTE\n25% tariffs on US$34bn of Chinese imports implemented\n25% tariffs on US$16bn of Chinese goods implemented\nUS and China agreed on a 90-day halt to new tariffs Huawei was added to the Entity List\nPhase One Trade Deal\nThe Hong Kong National Security Law was passed\nThe US Senate passed HFCAA that could lead to delisting of Chinese companies from the US\nNancy Pelosi visited Taiwan\nTaiwan Election\nThe House passed the HFCAA\nThe President's Working Group on Financial Markets released a report on protecting investors from significant risk from Chinese companies\nA federal judge blocked the Defense Department from restricting US investments in Xiaomi\nUS Election\nSEC Chair asked for stop on processing China mainland's companies for US IPOs through shells\nSEC finalized rules implementing the submission and disclosure in HFCAA\nThe CSRC was addressing key concerns on ADR delisting\nBali XiBiden Meeting\nTrade negotiation break down\nHigher implies \"worse relations\"\nSource: Goldman Sachs Global Investment Research\nExhibit 14: Concerns regarding Trade and “Soft” Tech have recently risen\n0%\n10%\n20%\n30%\n40%\n50%\n60%\n70%\n80%\n90%\n100%\nJan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24\nGS US-China Relations Barometer (GSSRUSCN) Sub-Indices\nCapital Mkt (62%)\nTrade (36%) Hard Tech (28%)\nSoft Tech (52%)\nGeopolitics (76%)\nHigher implies \"worse relations\"\nSource: Goldman Sachs Global Investment Research\n14 March 2024 10\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\nExhibit 15: The return beta to US-China risks has changed across onshore and offshore benchmarks\nExhibit 16: The impacts of US-China risks on Chinese equities appear dynamic in nature\n-60%\n-50%\n-40%\n-30%\n-20%\n-10%\n0%\n10%\nvs old barometer (2018-2020) vs new barometer (since 2021)\nIndex return correlation with US-China Relations Barometer\nMore intense US-China tension, lower returns\n-8.0\n-6.0\n-4.0\n-2.0\n0.0\n2.0\n4.0\nFeb-19\nMay-19\nAug-19\nNov-19\nFeb-20\nMay-20\nAug-20\nNov-20\nFeb-21\nMay-21\nAug-21\nNov-21\nFeb-22\nMay-22\nAug-22\nNov-22\nFeb-23\nMay-23\nAug-23\nNov-23\nFeb-24\nvs MXCN\nvs CSI300\n(1-year rolling T-stats)\nMore intense US-China tension, lower returns\nIndex return sensitivities to changes of US-China Relations Barometer\nSource: Bloomberg, Wind, Data compiled by Goldman Sachs Global Investment Research\nSource: Wind, Bloomberg, Goldman Sachs Global Investment Research\nExhibit 17: Consumer sectors tend to outperform when US-China tensions escalate\n-8\n-6\n-4\n-2\n0\n2\n4\n6\n-50% -40% -30% -20% -10% 0% 10% 20% 30% 40%\nRetailing\nMedia \u0026 Entertain\nCons Serv\nReal Estate\nFood \u0026 Stap Retailing\nDurables\nComm\u0026Prof Serv\nPharma \u0026 Biotech\nHealth Care Equip\nEnergy\nFood \u0026 Bev\nInsurance\nSoftware\nBanks\nTransportation\nUtilities\nAutos\nBrokers\nHousehold Products\nMaterials\nTelecom\nSemiconductors\nCapital Goods\nHardware\nCorrelation T-stat (RHS)\nCorrelation of MXCN sector relative returns with US-China Relations Barometer\nMore intense US-China tension, lower returns\nCalculation is based on weekly data since 2021.\nSource: FactSet, Goldman Sachs Global Investment Research\n14 March 2024 11\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\n\nTrading US-China relations via Chinese stocks\nApplying our barometer on index constituents in the MSCI China universe, we are n\nable to screen for names that may outperform or lag in the case of improving/deteriorating bilateral tensions, based on their historical price sensitivity with respect to the barometer. We call the lists US-China Tensions “Outperformers” and “Underperformers”.\nThematically, we note a high concentration of Hard and Soft Tech names in the n\nUnderperformers list that is empirically and conceptually more negatively exposed to worsening US-China relations. On the flipside, stocks that are led mostly by domestic investment and consumption dominate the representation in the Outperfomers list as they appear to be relatively immune from the tensions.\nThe relative performance between the two portfolios has correlated well, at least n\ndirectionally, with the barometer, suggesting that they could be regarded as\nefficient vehicles for investors to express their views on US-China relations in the equity universe.\nExhibit 18: Stocks that tend to outperform when the US-China tension escalates\nSource: FactSet, IBES, Goldman Sachs Global Investment Research\n14 March 2024 12\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\nExhibit 19: Stocks that tend to underperform when the US-China tension escalates\n\u003eUS$2bn \u003e US$5mn\n(Since 2018) (Past 1 year)\nMXCN onshore constituents tend to underperform when the US-China tension escalates 600584 CG JCET Group IT -0.76 -0.72 29.0 CNY 7.2 80 49.0 20.6 1.8 0.6 002600 CS Lingyi iTech IT -0.74 -0.35 5.6 CNY 5.5 54 27.5 13.4 1.8 0.9 600703 CG Sanan Optoelectronics IT -0.75 -0.19 13.2 CNY 9.2 55 131.9 45.5 1.7 0.6 603986 CG Giga Device Semiconductor IT -0.64 -0.34 71.6 CNY 6.6 131 103.1 39.3 3.0 0.6 002156 CS TongFu Microelectronics IT -0.67 -0.74 26.1 CNY 5.5 100 182.8 46.0 2.7 0.2 002916 CS Shennan Circuit IT -0.61 -0.73 89.3 CNY 6.4 31 21.8 30.1 3.2 1.0 002241 CS GoerTek IT -0.65 -0.82 17.5 CNY 8.3 182 55.6 21.1 1.8 1.0 002463 CS WUS Printed Circuit IT -0.66 -1.12 31.7 CNY 8.4 111 27.0 31.4 5.3 0.9 300308 CS Zhongji Innolight IT -0.65 -1.33 175.0 CNY 19.5 428 54.5 32.3 7.9 0.4 688036 CG Shenzhen Transsion IT -0.70 -0.87 167.7 CNY 18.8 63 15.8 21.6 5.7 1.3 603728 CG Shanghai Moons Electrical Industrials -0.58 -1.07 56.9 CNY 3.3 36 64.0 84.3 7.7 0.1 300502 CS Eoptolink Technology IT -0.70 -1.32 68.8 CNY 6.8 330 57.1 39.3 7.2 0.2 002456 CS OFILM Group IT -0.79 -1.15 9.3 CNY 4.2 335 140.9 8.1 0.0 601138 CG Foxconn Industrial IT -0.57 -1.23 24.9 CNY 68.7 257 18.5 17.6 3.1 2.8 000977 CS IEIT SYSTEMS IT -0.44 -1.15 42.1 CNY 8.6 371 32.4 27.5 3.1 0.4 000938 CS Unisplendour IT -0.51 -1.13 24.9 CNY 9.9 153 25.7 24.2 2.0 0.6 002281 CS Accelink Technologies IT -0.60 -1.11 39.0 CNY 4.3 164 21.0 41.7 4.3 0.5 601127 CG Seres Group Cons Disc -0.36 -0.88 95.1 CNY 20.0 668 15.0 0.0 600745 CG Wingtech Technology IT -0.72 -0.79 40.3 CNY 7.0 97 23.1 13.4 1.2 0.6 MXCN offshore constituents tend to underperform when the US-China tension escalates 1347 HK Hua Hong Semiconductor IT -0.27 -0.11 17.0 HKD 2.8 19 -8.2 29.4 0.6 0.0 2018 HK AAC Technologies IT -0.19 -0.17 22.1 HKD 3.4 16 66.0 18.6 1.0 1.0 285 HK BYD Electronic IT -0.16 -0.20 29.8 HKD 8.6 21 32.2 11.4 1.8 1.7 2382 HK Sunny Optical Technology IT -0.14 -0.16 49.9 HKD 7.0 60 67.4 20.5 2.0 1.0 175 HK Geely Automobile Cons Disc -0.11 -0.05 8.4 HKD 10.9 36 38.7 10.7 0.9 3.3 316 HK Orient Overseas Industrials -0.10 0.41 125.3 HKD 10.6 10 0.7 7.2 0.9 6.3 916 HK China Longyuan Power Utilities -0.07 0.03 5.9 HKD 2.5 13 14.9 5.0 0.5 3.9 968 HK Xinyi Solar IT -0.06 -0.26 5.9 HKD 6.7 14 25.0 10.2 1.5 4.6 992 HK Lenovo Group IT -0.06 -0.46 9.6 HKD 15.2 64 17.3 13.1 2.2 3.7 1211 HK BYD Company Cons Disc -0.03 -0.01 188.0 HKD 26.4 195 26.3 12.8 2.8 1.4 2359 HK WuXi AppTec Health Care 0.06 -0.25 46.8 HKD 2.3 46 20.9 10.4 2.0 2.9 6160 HK BeiGene Health Care 0.17 -0.24 97.1 HKD 15.4 20 6.8 0.0 2313 HK Shenzhou Int'l Cons Disc 0.15 -0.23 63.5 HKD 12.2 33 21.7 15.7 2.4 3.7 2015 HK Li Auto Cons Disc 0.03 -0.19 144.7 HKD 32.7 135 42.9 18.0 3.6 0.0\nAverage -0.4 -0.6 11.7 131 42.6 28.2 3.5 1.4\nPerformance sensitivity to changes of US-China Relations Barometer^ Ticker Name Sector Quoted Price\nQuoted Currency\nListed Mkt Cap (US$bn)\nADVT (US$mn)\n23-25E EPS CAGR (%) 24E P/E (X) 24E P/B (X) 24E DY (%)\nBottom 10 on/offshore stocks for each horizon\nNote: Prices as of Mar 8, 2024; Valuation items are I/B/E/S consensus. ^ is calculated based the weekly relative returns to MXCN since 2018. Grey highlights indicate top 10 stocks selected under each screening\nSource: FactSet, IBES, Goldman Sachs Global Investment Research\nExhibit 20: The relative performance of the two lists has linked well with market-implied US-China tensions\nExhibit 21: The Outperformers feature mostly leading domestic players while the Underperformers are centered around Tech\n40\n60\n80\n100\n120\n140\n160\n0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%\nJan-18\nJul-18\nJan-19\nJul-19\nJan-20\nJul-20\nJan-21\nJul-21\nJan-22\nJul-22\nJan-23\nJul-23\nJan-24\nUS-CN Relations Barometer\nRelative performance (outperformers vs underperformers for elevated US-China tensions) - RHS\nCorrelation: 57%\nIT, 70%\nCons Disc, 11%\nCons Disc, 15%\nIndustrials, 11%\nIndustrials, 6%\nUtilities, 6%\nUtilities, 3%\nCons Stap, 11%\nReal Estate, 11%\nEnergy, 11%\nFinancials, 20%\nComm Svcs, 3%\nHealth Care, 14%\nHealth Care, 6%\n0%\n10%\n20%\n30%\n40%\n50%\n60%\n70%\n80%\n90%\n100%\nOutperformers Underperformers\nSector Composition (Equal-Weights for Portfolio Constituents)\n(As US-China Tensions Escalate)\nSource: Wind, FactSet, Goldman Sachs Global Investment Research\nSource: FactSet, Goldman Sachs Global Investment Research\n14 March 2024 13\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\nAppendix\nExhibit 22: The Outperformers list is trading at close to 50% PE discount to the Underperformers list\n-70%\n-50%\n-30%\n-10%\n10%\n30%\n8\n12\n16\n20\n24\n28\n32\n36\nJan-18\nApr-18\nJul-18\nOct-18\nJan-19\nApr-19\nJul-19\nOct-19\nJan-20\nApr-20\nJul-20\nOct-20\nJan-21\nApr-21\nJul-21\nOct-21\nJan-22\nApr-22\nJul-22\nOct-22\nJan-23\nApr-23\nJul-23\nOct-23\nJan-24\nPE (x) PE premium/discount (outperformers vs underperformers) - RHS\nOutperformers as US-China tensions escalate\nUnderperformers as US-China tensions escalate\n10.2x (-1.3 s.d.)\n15.4x (+0.4s.d.)\n-46%\nSource: FactSet, Goldman Sachs Global Investment Research\nExhibit 23: Market concerns about Trade have recently risen\nExhibit 24: The implied tensions in Hard Tech are moderate...\n0 10 20 30 40 50 60 70 80 90 100\n0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%\nJan-18\nJan-19\nJan-20\nJan-21\nJan-22\nJan-23\nJan-24\nTrade News [RHS] Trade\nCovid Disruption\nTrade Sub-Index\n0 10 20 30 40 50 60 70 80 90 100\n0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%\nJan-18\nJan-19\nJan-20\nJan-21\nJan-22\nJan-23\nJan-24\nHard Tech News [RHS] Hard Tech Hard Technology Sub-Index\nSource: Factiva, Goldman Sachs Global Investment Research\nSource: Factiva, Goldman Sachs Global Investment Research\n14 March 2024 14\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\nExhibit 25: ...but those in Soft Tech have remained elevated\nExhibit 26: The implied tensions in Capital Markets fell as the broad ADR delisting risks were largely removed in late 2022\n0\n10\n20\n30\n40\n50\n60\n0%\n10%\n20%\n30%\n40%\n50%\n60%\n70%\n80%\n90%\n100%\nJan-21 Jan-22 Jan-23 Jan-24\nSoft Tech News [RHS] Soft Tech Soft Technology Sub-Index\n0 10 20 30 40 50 60 70 80 90 100\n0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%\nJan-18\nJan-19\nJan-20\nJan-21\nJan-22\nJan-23\nJan-24\nCapital Market News [RHS] Capital Mkt Capital Markets Sub-Index\nSource: Factiva, Goldman Sachs Global Investment Research\nSource: Factiva, Goldman Sachs Global Investment Research\nExhibit 27: The concerns about Geopolitics reached all-time high at the time when Russia invaded Ukraine in Feb 2022\n0 10 20 30 40 50 60 70 80 90 100\n0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%\nJan-18\nJan-19\nJan-20\nJan-21\nJan-22\nJan-23\nJan-24\nGeopolitics News [RHS] Geopolitics Geopolitics Sub-Index\nSource: Factiva, Goldman Sachs Global Investment Research\nExhibit 28: Key words in our online news indexes\nCategory New Search Keywords\n((China* or Chinese) and (US or U.S. or United States or America* or Trump or Biden)) and (import* from China or export* to China or tariff* or dumping or anti-dumping)\n(中国 and (美国 or 特朗普 or 拜登)) and (中美贸易 or 关税 or 倾销)\n((China* or Chinese) and (US or U.S. or United States or America* or Trump or Biden)) and (Huawei or ZTE or Apple or chip* or semi* or 5G or military) and (ban* or forbid* or restrict*)\n(中国 and (美国 or 美方 or 特朗普 or 拜登)) and (华为* or 中兴* or 苹果* or 芯片 or 半导体* or 5G or 军事) and (禁止 or 限制 or 制裁)\n((China* or Chinese) and (US or U.S. or United States or America* or Trump or Biden)) and (internet or AI or artificial intelligence or biotech* or pharm* or health care or cloud or data security) and (entity list or unreliable list or sanction list or ban* or forbid* or restrict*)\n(中国 and (美国 or 美方 or 特朗普 or 拜登)) and (互联网 or 人工智能 or 云* or 数据 or 生物科技) and (实体清单 or 不可靠清单 or 实体名单 or 不可靠名单 or 禁止 or 限制 or 制裁)\n((China* or Chinese) and (US or U.S. or United States or America* or Trump or Biden)) and (currency manipulator or PCAOB or divest* or uninvestable or HFCAA or delist* or sanction list or non-SDN list)\n(美国 or 特朗普 or 拜登 or 参议院 or 众议院 or 国会) and (中国 or 中国公司 or 中国企业 or 中概股) and (限制投资 or 禁止投资 or 退市 or 终止上市 or 金融战 or 外国公司问责法* or 不可投资 )\n((China* or Chinese) and (US or U.S. or United States or America* or Trump or Biden)) and ((military or geopolitics or conflict or battle or war or tension*) or (Hong Kong or Taiwan or Cross-Strait))\n(((中国 or 中方) and (美国 or 美方 or 特朗普 or 拜登)) or (台海 or 台湾 or 香港)) and (军事 or 地缘 or 博弈 or 冲突)\nTrade\nHard Tech\nCapital Markets\nGeopolitics\nSoft Tech\nSource: Factiva, Goldman Sachs Global Investment Research\n14 March 2024 15\nGoldman Sachs China Strategy\nfd1822e448f54f98a6011f57e79f4c98\n\nDisclosure Appendix\nReg AC\nWe, Kinger Lau, CFA, Timothy Moe, CFA, Si Fu, Ph.D. and Kevin Wang, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm’s business or client relationships.\nUnless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.\nDisclosures Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. 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