3 reasons to believe in Chinese equities 

2025 was a turnaround story for Chinese equity markets after a prolonged period of relative risk aversion. While concerns about the sustainability of the Chinese growth model have not gone away, market sentiment is turning more positive, boosted by emerging growth stories, reduced geopolitical risks, and stronger policy support. 

1. Sentiment shift on innovation and industrial competitiveness

In 2025, the MSCI China Index, a proxy for the Chinese equity market, returned 31.17% in local currency terms, strongly outperforming the MSCI All Country World Index (22.06%). Last year’s performance also represents a meaningful increase over the prior year, in which the MSCI China Index generated 16.37%. 

Behind the solid performance was growing optimism in the homegrown innovation sectors and the competitiveness of domestic companies. This triggered a sizable reallocation of retail savings from safe deposits and real estate into the equity markets. Cheap valuations and improved growth potential also prompted international investors to reduce their underweight positions in China. Further support came from the People’s Bank of China, which, in an effort to encourage more shareholder-friendly behavior, set up a financing mechanism that facilitates dividend payouts and share buyback activities.

This positive total return story occurred despite continued price deflation and real estate woes. Although these risks aren’t going away this year, because both domestic and international investors remain significantly underweight China, the market recovery still has ample room to run in 2026. 

2. US-China: Transitioning into a managed competition 

US‑China trade tensions have long dominated markets and raised concerns about renewed escalation, but the summit between US President Donald Trump and China’s President Xi Jinping in October 2025 delivered a more positive outcome than anticipated. The leaders reached a deal that lifted many of the risks weighing on Chinese equities (Figure 1). As both US and China work to address their respective economic vulnerabilities, their trade relationship is likely to stabilize, which is likely to reduce China’s equity risk premium meaningfully.

Figure 1

The summit outcome supports China’s Five-Year Plan, which emphasizes industrial upgrades, technological self-sufficiency, and innovation. The US seeks similar outcomes. The result is a sense of “managed competition” between the world’s two largest economies, each of which aspires to surpass the other in manufacturing and technology. It’s worth noting that although the US and China maintain a competitive dynamic, at the time of writing, the risk of outright confrontation is contained. 

We see further evidence of the transition toward competition in the recent tensions around Venezuela and Greenland. With Washington taking steps to bolster what it perceives as its vital interests in the Western Hemisphere, Beijing took a distinctively more long-term approach to its strategic interests. China is seeking to position itself as a potential counterweight to a more assertive US and offering relatively greater predictability. While global tensions persist, the overseas market environment for Chinese companies appears to have improved overall. 

3. Long-term policy focus on “quality” over “quantity” of growth

Structurally, the Chinese economy continues to pivot away from property as a growth engine, toward innovation-led “quality” drivers, such as AI, robotics, renewable energy, and high-end manufacturing. Although this transition represents a headwind to near-term growth, it’s critical to China’s latest Five-Year Plan as well as the long-term health and sustainability of economic growth. 

Cyclically, the economic focus is on the “quality” in profitability. China introduced its “anti-involution” initiative to address the chronic failure to translate competitiveness into corporate profits. The effort to rein in overinvestment and rationalize oversupply in the solar and lithium battery sectors last year has seen initial progress in margin recovery. We expect the policy to broaden in 2026 to support further return on equity normalization.

What’s more, we have seen an overhaul of the regulatory framework in China to support a “quality” capital market. Regulatory changes include stricter IPO standards, enhanced corporate governance, rules for investor protection, and incentives for shareholder returns, which were long ignored by the policymakers. There have also been ongoing reforms to invigorate market participation and promote equities as a store of household wealth. Most of these efforts will likely take time to materialize, but they demonstrate a growing commitment to the long-term health of the equity market.

Investment implications

For investors, this is a turning point. China’s equity market is becoming more policy aligned, institutionally credible, and structurally supported, offering differentiated opportunities in a global portfolio. 

As investors take a closer look at Chinese equity markets, they may wonder which areas of the market are poised to benefit most from the evolving policy and economic strategy. Looking ahead, I believe the following stand out: 

• Innovation and advanced manufacturing – Sectors like semiconductors, automation, and clean energy, which are aligned with China’s strategic pivot toward technology and industrial improvement, are likely to see continued support. 
• Domestic services consumption – As the economy rebalances and household income recovers, domestic consumers are likely to see the share of spending on services converge with developed economies.
• High-dividend equities – Given the policy support, more companies are using cash dividends, buybacks, mergers and acquisitions, and equity to boost shareholder value.