10 reasons why China could be the next rerating story

As the narrative of US exceptionalism is beginning to wane — illustrated by the number of global fund managers trimming their US equity exposure¹ — investors are increasingly asking: where next? While the answer is likely to be multifaceted, we think it should encompass China. Despite signs of a peak in US equity dominance, foreign investors have yet to meaningfully re-engage with Chinese markets. Allocations to Chinese equities remain 53% below their 2020 highs, even after a modest uptick in early 2025². In our view, this disconnect offers attractive potential, even if further tariff volatility cannot be excluded in the short term. Here’s why we believe time has come to revisit Chinese equity exposures.

1. Attractive valuations with upside potential
On a relative and historical basis, Chinese equities are today trading at potentially compelling valuations (Figure 1). With early signs of an earnings inflection and foreign ownership still low, renewed international interest could act as the catalyst for the next leg up.

Figure 1

2. Improving fundamentals
Companies are improving capital allocation in line with global best practices as evidenced by rising dividend payouts, share buybacks and a more disciplined approach to debt management. Regulators are also encouraging listed companies to enhance transparency and return capital to investors. These shifts not only improve balance-sheet resilience but also signal a maturing market environment where corporate strategies are more aligned with investor interests. For long-term investors, this trend enhances the appeal of Chinese equities as a source of sustainable returns.

3. A more resilient economic model
We believe that the ongoing deleveraging of the Chinese property market and a growing willingness by the Chinese government to use its policy levers has started to reduce systemic financial risks, particularly in the banking sector, thus strengthening the country’s financial foundations.

4. Pro-private sector policy shift
Chinese policymakers now appear increasingly supportive of private enterprise and the need to foster innovation and accelerate the transition to a knowledge-based economy.

5. Countercyclical consumer strength
Consumer confidence, while still recovering, is showing signs of improvement. Chinese households maintain high savings rates, providing dry powder for consumption.

6. Property market stabilisation
The worst of the property downturn appears to be over, with growing signs of stabilisation and even some green shoots emerging in key urban markets.

7. Fiscal support from local governments
With local government finances now on a more stable footing, we expect increased local government bond issuance to support infrastructure and consumption, providing a tailwind for domestic demand.

8. Diversification benefits
Chinese equities tend to exhibit low correlation with global markets, making them a valuable portfolio diversifier. We expect this divergence to accelerate over time as deglobalisation gathers pace. 

9. Strategic decoupling from the US
Chinese companies are systematically reducing their reliance on US capital markets and shifting their listing to the domestic market or Hong Kong, creating additional opportunities for diversification.

10. Deepening global trade ties beyond the US
China is proactively looking to diversify its trading partners, notably with a pivot towards Europe in particular. In early 2025, China and the EU agreed to deepen economic and trade relationships. While friction points will be hard to resolve, Chinese officials emphasised their willingness to address these “differences” constructively in an acknowledgement of European policymakers’ concerns. 

The next rerating story

While investor sentiment towards China remains understandably cautious amid geopolitical and tariffs-related uncertainty, the underlying fundamentals point to a more positive long-term story rooted in domestic structural improvements rather than external dependencies. From a more resilient economic model and pro-private sector reforms to deepening trade ties beyond the US — especially with Europe — China is increasingly positioning itself to thrive even in a more fragmented global order, a shift not yet reflected in valuations. For investors willing to look beyond the headlines, China may well be the next major rerating story.

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¹ Bank of America Global Fund Manager Survey. Data as of May 2025. | ² Ibid.