Stephen Jen says China has turned a corner. He thinks equities could jump roughly 10% soon.

Why Jen is bullish

Stephen Jen, chief executive officer of Eurizon SLJ Capital, told journalists and market analysts that Chinese shares look deeply undervalued. "Chinese equities are extremely undervalued," Jen said, arguing that investor positioning is heavily underweight China and that a sustained rally is possible.

Jen backs his view with specific policy moves and market data. He points to policy moves Beijing made last year — cuts to borrowing costs, lower mortgage rates, relaxed homebuyer rules in big cities and a cut in the reserve requirement for banks — as evidence that authorities are willing to provide support to the economy. Those measures, taken together, helped spark a notable rebound in local markets in late 2024, and that momentum is central to his bullish view.

His optimism rests on macro factors like easing global funding and micro factors such as relatively low valuations in some Chinese sectors. On the macro side, Jen points to easier global funding conditions as U.S. rates trend lower.

Central bank signals rate cuts make carry strategies and cross-border flows look different. On the micro side, valuations on many Chinese sectors still lag global peers, which Jen says gives room for catch-up gains.

He also warned investors aren't fully positioned for a China rebound. That matters. When large pools of capital are underweight, even modest flows back into the market can amplify gains.

The $1 trillion "avalanche" scenario

Jen has sketched a more dramatic possibility: large-scale repatriation of dollar assets held by Chinese corporates and institutions. He suggested that if offshore dollar holdings were shifted back into yuan en masse, the currency could appreciate by 5% to 10%.

Some analysts call the scenario an 'avalanche': if U.S. rates fall, dollar assets could look less attractive and holders might repatriate funds. China has accumulated big offshore positions since the pandemic. Put those facts together and it's easy to imagine a fast move into yuan.

But several factors complicate that story. Custodial arrangements, corporate hedging, and the strategic motivations of state-linked entities all make a sudden, coordinated sell-off less likely.

Markets also have ways to absorb flows, and central banks can step in to smooth extremes.

How Beijing and the PBOC could react

Jen acknowledges the People’s Bank of China can and will act to prevent excessive volatility. He noted Beijing has tools to manage currency swings: daily reference rates for the onshore yuan, adjustments to foreign-currency reserve requirements for banks, and direct intervention in FX markets.

People familiar with the matter say China's foreign-exchange watchdog is monitoring how a stronger yuan would affect exporters. And that’s important because a rapid appreciation would squeeze exporters' margins and risk slowing recovery in manufacturing and trade-driven regions.

So while a 5%-10% yuan gain is on the table in Jen's scenario, the PBOC's playbook gives authorities options to blunt a runaway move. Those tools make an unchecked market-driven yuan surge less likely.

Carry trades, contagion risk and market mechanics

Guan Tao, economist at Bank of China International Ltd., has flagged another channel: the carry trades funded by a weak yuan. Guan warned that a sudden unwind of those positions could echo past episodes, like the unwind of yen-funded carry trades, which once rippled through stocks, credit and emerging-market currencies.

And those linkages matter. If a yuan-funded carry trades collapses, it could create knock-on selling in Asian equities, push up credit spreads and force central banks to respond. Past funding shocks demonstrate how rapidly funding moves can spill over into stocks, credit and currencies.

Still, Jen and others point out that the yield gap between U.S. And Chinese assets remains wide in many cases. That yield cushion makes immediate, wholesale liquidation of dollar assets less tempting for corporates and investors who need income or liquidity.

What it would mean for global markets and Treasuries

A large repatriation would shift global capital flows and could pressure bond and currency markets. Jen suggested such a move could push the yuan higher and influence asset prices worldwide. U.S. Treasury markets could feel pressure if foreign holders cut holdings sharply. But source analysis warns the impact might be manageable: central banks and markets can adjust, and past episodes show large shifts can be absorbed without total disruption.

Jerome Powell, Fed Chair, said at the Jackson Hole symposium that the time has come for the U.S. To cut policy rates, a comment market participants treat as a directional signal for policy shifts that could alter FX attractiveness. Powell's remarks are part of what underpins Jen's timing: rate cuts in the U.S. Would change the relative returns on dollar assets and could open the door to currency moves.

How investors might position

Investment managers face a thorny trade-off. If Jen is right, there’s upside in Chinese equities and possible currency gains that would boost returns for onshore assets. If the avalanche story is overstated, premature big bets could lead to drawdowns if policy support fades or growth disappoints.

That tension means many global investors are likely to nibble rather than sprint. They may add exposure through selective sectors that have been hit hardest by underweighting, like domestic-consumption names and some financials. Others will keep hedges in place to protect against sudden FX moves or policy reversals.

Jen's bullish stance comes amid more cautious analysts who doubt a mass sell-off of dollar assets. Several analysts and strategists say a mass sell-off of dollar assets is improbable and that Beijing would avoid a rapid currency rise that undermines exporters. That's why the debate hasn't closed on whether stocks jump 10% or whether a yuan surge materializes at all.

Historical context and the near-term outlook

In September 2024, Beijing's stimulus actions — including rate cuts and reserve requirement reductions — helped push shares higher for a string of sessions, with markets rallying on optimism about policy support. Jen points to that episode as proof that policy can reignite risk appetite when authorities choose to act.

Right now, markets are watching three linked elements: China's domestic policy follow-through, positioning by big dollar-asset holders, and the timing of U.S. Rate cuts. Put differently, you need all three pieces to line up for Jen's most extreme scenarios to play out.

What investors decide will depend on how they judge the odds that those pieces fall into place.

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"Chinese equities are extremely undervalued," said Stephen Jen, chief executive officer of Eurizon SLJ Capital.