A review of Chinese contracts, disclosures, and other documents identifies $3.2B+ in compute projects built or planned around Nvidia GPUs restricted by the US (Eduardo Baptista/Reuters)

As China's authorities push for companies to return more cash to shareholders, a report by Goldman Sachs suggests that Chinese firms could see a 15% boost in their equity valuations. The US investment bank's analysis indicates that increased share buybacks and dividend payouts, in line with policymakers' efforts to improve shareholder returns, could lift the MSCI China Index by around 15% from current levels.

Historically, Chinese companies have favored issuing new shares over buybacks, resulting in a net share issuance that has diluted earnings per share by approximately 15% cumulatively. This situation has been exacerbated by a decline in return on equity among Chinese listed companies, with a six-year decline in profitability. Additionally, the MSCI China Index's price-to-earnings ratio has dropped from 17 times to 9.7 times since its peak in early 2021.

Regulators in China have recently sought to encourage companies to buy back shares and support the stock market amid weak investor confidence and poor corporate profitability. Measures announced on November 2, such as lowering the interest rate on a central bank relending programme by 25 basis points and removing some restrictions on share buybacks, are expected to contribute to a re-rating of about 10% in company valuations as profitability normalizes.

Goldman Sachs forecasts that Chinese companies will deliver annualized earnings-per-share growth of around 10% and a normalized return on equity of 12% over the next five years, driven by artificial intelligence, a trend of "going global," and policies to curb excessive competition.