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China's markets entered 2025 on shaky ground, reversing a rally in late 2024 after Beijing boosted stimulus measures to shore up its flagging economy.
"China equity markets rebounded in 2024. It had a fast and furious rally in Sep-Oct 2024, driven by the domestic policy pivoting," wrote BofA Securities analysts in a Monday report.
However, the rally has faltered, with Chinese stocks posting their worst start to a year in nearly a decade on the first day of trading this year.
The strength and scope of China's policies are taking time to flow through the system, so their impact on GDP and earnings will lag for quarters, wrote the BofA analysts.
China's benchmark CSI300 is down 3.5% so far this year, while Hong Kong's Hang Seng Index is down 3.2%.
On Tuesday, the CSI300 index closed 0.7% higher. The Hang Seng closed 1.2% lower.
The Chinese yuan also hit a 16-month low on Monday, fueled by investor jitters ahead of the inauguration of US President-elect Donald Trump on January 20. Trump has threatened to impose tariffs of 60% on Chinese imports to the US.
On Monday, the Pentagon designated two high-profile tech companies — Tencent and CATL — as Chinese military companies operating in the US.
Tencent is a tech giant known for its WeChat super app, while CATL is the world's largest battery maker and a major supplier to EV maker Tesla.
The 134 companies on the Pentagon's blacklist aren't sanctioned but being on the list could discourage other American firms from doing business with them.
Tencent and CATL shares declined sharply on Tuesday, in contrast to strong double-digit gains last year.
Both Tencent and CATL have pushed back on the designation.
"Tencent's inclusion on this list is clearly a mistake. We are not a military company or supplier," a Tencent spokesperson said in a statement to Business Insider.
While the list has "no impact" on Tencent's business unlike sanctions or export controls, the company "will nonetheless work with the Department of Defense to address any misunderstanding," the Tencent spokesperson added.
A CATL spokesperson told BI the company "has never engaged in any military-related business or activities, so this designation by the Department of Defense is a mistake."
"We will proactively engage with DoD to address the false designation, including legal action if necessary, to protect the interests of our company and shareholders as a whole," said the CATL spokesperson.
CATL, which has a market share of about 40% in the global EV cell market, said it expects the designation to have "no substantially adverse impact" on its business.
The designation of Chinese firms on the US military blacklist is a foreboding sign that "tensions are unlikely to be watered down anytime soon," wrote Yeap Jun Rong, a market strategist at online trading platform IG, on Tuesday.
This, alongside uncertainty over Trump's trade policies, is likely to keep investor risk appetite in check, Yeap added.
BofA analysts also view geopolitics as a key risk factor for the Chinese markets this year, even as they believe that the worst of position-selling should be over.
"Global trades, supply chains, capital flow, and economic growth in 2025 are facing uncertainties from geopolitical dynamics, which may undermine investors' confidence on China markets again," they wrote.
