The outlook for Chinese equities in 2026 is bright. Its ability to stand up to US trade demands reflects the narrowing technological gap between the two economies. We anticipate a less confrontational approach towards trade in 2026 as both sides seek to focus on growing their economies.
Market themes in 2026 include: rising corporate margins driven by anti-involution policies reducing unsustainable competition; increasing power demand as China’s Deepseek moment drives rising investment in data centers, and fiscal stimulus to support growth.
In the year ahead China will release its fifteenth five-year plan focusing on sustainable, efficient and balanced economic growth. We expect emphasis on consumption and innovation compared to investment and green energy in the 14th plan.
Sector beneficiaries in the Plan are expected to include semiconductors, consumer discretionary, power equipment and biotech. Prior plans were a useful roadmap for investors in deciding where to allocate capital.
Earnings and valuations
Consensus expectations for MSCI China 2026 earnings growth is 15%, with 35% forecast growth in the consumer discretionary sector,1 led by China’s internet and delivery platform giants. Anti-involution is expected to reduce unsustainable competition and boost corporate margins in the markets largest sector.
China Sector Earnings Growth 2026 Estimate
MSCI China 2026 price-to-earnings valuation of 12.6x is slightly above the long-term average,2reflecting the 28% gain in the index between January and mid December 2025. Global equity funds are 6.5% underweight China, compared to a post COVID-19 average of 5.5%.3This indicates there is potential for a pick-up in foreign fund inflows, given the prospects for a recovery in margins to drive earnings and still reasonable valuations.
Key themes
Anti-involution is a multi-year theme focusing on a pivot from price competition to quality driven growth. The policy is starting to drive rational competition with 2026 likely to bring about increased consolidation in sectors with over capacity. This is positive for corporate margins and return on equity, with large companies expected to be the biggest beneficiaries.
Deepseek moment. The release of Deepseek’s large language model in January 2025 shook the technology world. Its efficiency4 and use of open-source software gives it an edge in an environment where the needs of power hungry proprietary models are colliding with constrained power grids. China’s monthly token use in AI models is forecast to be in a range of 220-670Qa between from 2025 to 2030, compared to between 100-175Qa in the US.5 This is expected to require significant data center and in turn power investment.
Local governments in Gansu, Guizhou and Inner Mongolia have lowered power prices for data centers using domestically produced chips. This is a clear signal that China is prioritising growth of domestic AI models, with positive implications for power equipment suppliers.
China and US Hyperscaler Token Usage 2025 & 2030
Fiscal stimulus. The central government will increase bond issuance by CNY1Tn in 2026, with supply front loaded to the start of the year. The fiscal deficit is expected to increase to 4% of GDP. The stimulus will focus on boosting consumption and targeted support for innovation in sectors including semiconductors and those with high import content.
Sector views
China Sector Performance 2025
Technology. China continues to close the technology gap with the US in the semiconductor sector. Technological independence remains a priority with the government committed to removing non Chinese software and replacing it with domestically developed solutions. Developing domestic ecosystems creates the potential for an alternative global AI supply chain. This may provide export opportunities to Belt and Road countries where China has already had success in exporting green technologies and electric vehicles.
Consumer discretionary. The impact of anti-involution is expected to be positive on the sector as companies pivot from competing solely on price to a focus on quality. We expect this to be positive for corporate margins as reflected in the 35% consensus earnings growth forecast for the sector. We remain positive on Chinese internet platform companies, viewing anti-involution as a positive catalyst.
Industrials. We are focused on the Chinese power equipment sector as the prime beneficiary in the growth in power demand for data centers and the replacement of ageing equipment globally. The IEA is forecasting the installed power base for data centers globally to increase by >20% annually between 2025–28. Given the capacity constraints in Europe and the US, Chinese power equipment companies have the potential to increase market share given their cost efficient, scalable solutions.
Health care. The Chinese biotech sector is witnessing significant growth, we are focused on oncology where China has witnessed a rise in its share of global trials to 39% in 2024 from 5% in 2014.6 The international acceptance of Chinese clinical data has increased investor confidence towards the sector. In particular its success in non-small cell lung cancer trials, which was validated in a study published in The Lancet medical journal in 2024.
- China’s advantages in Biotech include:
- Labour costs
- Economies of scale
- Supply chain
- Government support
- Cost effective R&D and patient trials.
The outlook for Chinese equities in 2026 is bright. Catalysts to drive the market higher include the positive effect of anti-involution on unsustainable competition. This has the potential to increase margins and drive consensus forecasts of 15% earnings growth. We are positive on the semiconductor, consumer discretionary, power equipment and biotech sectors.
Endnotes
Source: IBES as of 2 December 2025.
Source: Bloomberg as of 2 December 2016. 15-year average price-to-earnings ration s 10.9x.
Source: EPFR as of 30 September 2025.
Deepseek’s V3 model claims to use 90% less computing power than LIama 3.1.
Sources: CITIC Securities, Microsoft, Alphabet, Amazon, as of 1 December 2025.
Source: IQVIA.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Hong Kong and Taiwan could be adversely affected by its political and economic relationship with China.
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© Franklin Templeton
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