Chinese equities are on track to deliver their strongest quarterly performance relative to the S&P 500 in nearly 15 years, as investors rotate out of overvalued U.S. stocks into battered Chinese shares, betting on a policy-driven recovery.

The iShares China Large-Cap ETF FXI has surged 26.6% year-to-date through March 17 close, heading for its best quarterly performance since early 2009. Meanwhile, the SPDR S&P 500 ETF Trust SPY is down 3.2% year-to-date, pushing Chinese stocks' relative outperformance to nearly 30%, the widest margin since mid-2007.

Value Partners Group expressed optimism about the Chinese equity market, stating in an email Monday that "the China A-share market is close to the bottom. Valuations are low, and so are market expectations, which means downside risk is limited."

The firm anticipates an upward market trend in 2024, albeit with volatility due to uncertainties surrounding Trump-related tariffs, geopolitics and China's domestic policy focus on demand versus supply-side measures.

Chart: Chinese Stocks Outshine S&P 500 In Best Quarter Since 2007

China's Policy Push To Stimulate Consumption

On Sunday, China’s State Council announced a “special action plan” to boost domestic consumption. The initiative includes policies aimed at raising incomes, expanding social safety nets, improving product quality and lifting purchase restrictions to spur spending.

Goldman Sachs' economist Yuting Yang acknowledged the direction of the stimulus but emphasized that "both funding and implementation matter for the effectiveness of China’s consumption stimulus."

China has struggled with weak consumer confidence, exacerbated by a troubled real estate sector and sluggish labor demand.

“Stabilizing property prices, improving labor demand and establishing a better social safety net are necessary to improve household income and facilitate a more sustainable consumption recovery,” Yang added.

Tech Giants Lead The Market Surge

Alibaba Group Holdings Ltd. BABA soared 4.6% on Monday, extending its year-to-date rally to a staggering 74%.

Meanwhile, Baidu Inc. BIDU surged over 9% after unveiling Ernie X1, its latest AI model. The company claims Ernie X1 delivers performance comparable to DeepSeek's AI at half the cost, reinforcing China’s AI ambitions in the global tech race.

For now, the numbers tell a compelling story: Chinese equities are mounting an extraordinary comeback, outpacing U.S. stocks at a rate not seen since 2007. Whether this rally is a temporary repricing or the start of a longer-term trend depends on Beijing's ability to sustain economic growth and investor confidence.

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