After leading the world in stock market performance last year, China has started 2021 on a strong note. Its CSI 300 index, which tracks the 300 biggest stocks on the Shanghai and Shenzhen stock exchanges, surpassed its 2015 peak on January 5, reaching its highest level in 13 years. Is this bullish start a sign of another record year for Chinese equities? The macro environment certainly looks supportive of further gains in Chinese equities this year. China’s gross domestic product is on track to return to its pre-pandemic growth trend of around 6 per cent year on year in the fourth quarter of 2020. That robust pace should carry on through the year. Markets expect the Chinese economy to continue to lead the global recovery and expand by more than 8 per cent this year, which suggests a healthy earnings recovery for Chinese companies. The private sector is likely to increasingly take the lead from the public sector in spurring China’s economic growth. Infrastructure investment was a key driver of China’s growth last year, supported by strong fiscal stimulus. But increasingly, private-sector consumption and investment will play a more important role. The emergence of several Covid-19 clusters in China recently have dampened services consumption, but this should normalise as vaccines are rolled out and social distancing measures are loosened in the coming months. Household income is likely to continue to improve, especially for migrant workers, who account for a significant share of services sector employment. Consumers are also expected to spend some of the precautionary savings built up last year, as improvements in the coronavirus situation boost confidence. Manufacturing investment growth is likely to improve further this year, helped by a reduction in US-China trade uncertainty with the incoming Joe Biden presidency , greater control over the coronavirus and recovery in corporate profitability. China’s export performance was one of the bright spots last year and will remain robust this year as global activity and trade recover. Despite tighter Covid-19 restrictions amid rising case counts, recent data suggest that manufacturing growth held up relatively well across developed market economies in December. The December manufacturing purchasing managers’ index (PMI) readings – a survey of sentiment among factory owners – for the US, Britain and the euro zone were all higher than for November. This is in sharp contrast to what we observed during the first wave of lockdowns last year and this more resilient demand should limit any negative effect on China’s exports. More importantly, the near-term hit to the global economy from the resurgence in coronavirus virus cases is sure to be cushioned by further policy support. In the US, an earlier-than-expected passing of the US$900 billion stimulus package in late December provided more support for households and small businesses. Then the recent Democratic sweep of the two Georgia Senate seats signalled that we can expect even more fiscal spending, which will further offset some of the negative coronavirus shocks. The European Recovery Fund was also finally approved in mid-December, paving the way for disbursement of the €750 billion fund (US$912 billion) this year. In addition, the British government unveiled a fresh £4.6 billion (US$6.2 billion) package of measures last week to help businesses through the latest national lockdown. Many factors support continued highs for Chinese stocks but there is a major looming risk: policy overtightening in China. China’s economic recovery has so far been uneven, with smaller enterprises and the services sector hit harder by the pandemic. It will be important in the near term to keep the monetary policy stance accommodative, to facilitate a smooth transition from growth that is led by the public sector to one that is led by the private sector. China’s policy stance is likely to become less accommodative this year as the economy continues to rebound, making it hard for Chinese equities to rise. But this policy backdrop is unlikely to become a headwind. On the monetary side, we are likely to see a gradual exit from the loose monetary policy stance adopted last year, as Chinese policymakers focus more on preventing systemic risks in the financial system. Marginal monetary policy tightening may come in the form of slower credit growth but policy rate hikes seem unlikely this year. Fiscal support to the Chinese economy is also likely to moderate this year. That said, China’s Central Economic Work Conference in December highlighted the importance of maintaining the necessary support for economic recovery, and avoiding any sudden turns in policy direction. Therefore, any withdrawal of policy support will be very gradual, given the still-significant uncertainties around the coronavirus and the global macro environment. Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management