Key Takeaways
- Ongoing improvements in U.S.–China trade relations provide market support but are not a catalyst for longer or sustainable returns.
- China’s diversification and CapEx linkage to the global AI cycle are underappreciated positives and have countered some geopolitical headwinds.
- Investors should position for broader market returns; a decisive bottoming in property prices and a gradual recovery in consumer confidence could drive a wider market advance over the next six to 18 months, in our view.
- China remains under-owned and mispriced, offering a combination of attractive entry valuations, structural innovation, and cyclical recovery potential.
China's equity market returned more than 40%1 so far this year, a performance that was last exceeded in 2017. It is a significant turnaround from 2022 and 2023, when the market generated nine-month losses of 23% and 11%, respectively.
We attribute this performance to the general re-rating of an equity market that has been at historically low valuations for the past four years. In September 2024, many China equity valuations were at levels not seen since the Great Financial Crisis (GFC) of 2008, and stocks in segments including mobile communications had higher multiples during the financial crisis. Geopolitical tensions with the U.S., domestic regulatory interventions and China’s COVID shutdown policies left many parts of the market under-owned and mispriced.
We believe the government’s actions in September last year to backstop an ailing real estate sector, provide liquidity support for equity markets and extend additional funding to provincial governments, marked a turning point. These measures helped reset expectations and initiated a recovery in investor confidence. Since then, the government has steered a modest course, in favor of more targeted reforms and support for businesses and consumers. We believe this quiet confidence in the economy by China’s leadership has helped shore up and sustain positive investor sentiment.
Drivers of the rally
A second leg of 2025’s rally in Chinese equities has been the global buildout of artificial intelligence (AI). Beginning with the breakthrough success of the DeepSeek open AI platform in January, the advancement of Chinese companies in the field, from both a hardware and software perspective, has gained market recognition. China’s goal to create a self-sufficient technology and AI ecosystem—and its renewed backing for the country’s internet and tech giants after years of regulatory intervention—has also resonated with investors.
The third leg to the rally, in our view, has been shifting geopolitical dynamics. The Trump administration’s broad initiative to tax most of its trading nations with reciprocal tariffs has, to some extent, diluted the U.S.-China specific sentiment overhang. More recently, the pause on additional tariffs and the agreement between the two nations to roll back trade curbs have eased near-term investor anxiety.
These three developments have sharpened global investors’ understanding of China’s evolving growth drivers in our view. They underscore that China is a domestically driven economy and that its trade with the U.S. is one component of an export base that is increasingly diversifying to other regions including Asia, Africa and Latin America. We also believe investors better appreciate that China is an economy that continues to foster strong, innovative companies with bright prospects for growth.
Where we stand today
The re-rating of China’s market has, in our view, been largely multiples-led, supported by easing of geopolitics, the AI boom, government stimulus and attractive valuations.
The trade agreement reached between the U.S. and China in late October was encouraging, mainly because it signaled dialogue between the world’s two largest economies. If the agreement is upheld, China will be subject to tariffs of approximately 47%, and the U.S. will have less restricted access to China’s rare earth minerals. There also appears to be some scope for China and the U.S. to engage in freer trade in semiconductor chips.
However, we continue to view geopolitics as a wild card, requiring caution in the event of sudden escalations in negative sentiment. We also don’t see positive geopolitical developments as a meaningful or sustainable driver of returns unless there is a ‘grand’ deal and a meeting of minds between the two countries to address bigger structural issues such as trade balance, security and technological advancement.
Gains from AI have been both earnings and multiples-driven and while Chinese companies in the space have potentially long runways of growth, it remains one narrow segment of the broader market.
Instead, we believe investors should focus on returns driven more by the broader economy and earnings growth. In our view, a recovery in the property market remains the single most important factor in supporting China’s economic expansion. Real estate has experienced month-on-month price declines since mid-2021 and its downturn continues to weigh on consumer sentiment and household confidence. There are signs of stabilization and progress, including inventory drawdowns across listed developers, but there is still a way to go. So a broader strategy is one that requires patience. Over time, we expect that a recovery in the property market will take hold and support a recovery in consumer sentiment and spending.
In the last quarter, earnings were broadly encouraging across sectors, with the exception of consumer staples, consumer discretionary and real estate. Financials, particularly life insurance companies, performed well. We are seeing a structural shift as savers move from putting savings into property or on deposit and instead into life insurance investment products. We also saw robust earnings in utilities, materials and industrials, including electrical vehicle (EV) battery suppliers, and health care, e-commerce, internet platforms and IT.
Looking ahead to the next 12 months, we see significant value in China’s equity market. In the MSCI China Index, consensus estimates project earnings growth to recover significantly while valuations in many sectors remain compelling. We anticipate continued strong performance in financials, materials and industrials and in supply chains for exports sectors. We also expect gradual stabilization in the property market and with it improvements in consumer sectors. Meanwhile, the Chinese equity landscape also features modern, innovative companies—including digital platforms and e-commerce leaders and companies in the AI infrastructure and biotech space.
For these reasons, we believe investors should seek a broad, long-term exposure to Chinese equities as different sectors and parts of the economy grow and recover at different rates.
Notes: 1 MSCI China Index, as of Sept. 30 2025.
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The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
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