The Chinese stock market presents a landscape that differs from what macroeconomic readings tell us about the shape of the wider economy. While issues around consumer and business confidence and the poor state of the property market cloud the economic outlook, we can see multiple factors that could drive the stock market this year.
They include policymaker support, technical support from ‘southbound equity buyers’, and the return of global capital if the exceptional position of the US economy and stock market continue to erode.
One crucial aspect that we believe global investors have overlooked is the potential of Chinese enterprises, particularly private-owned enterprises (POEs). Despite challenges in tech infrastructure, these POEs are poised to make significant strides in AI applications, robotics, and automation development.
Chinese stocks on the rise
Chinese equities experienced a sharp rally last September after Beijing pivoted toward greater stimulus.
The market saw volatility in early January due to US restrictions on major Chinese companies1, but recovered when tariff announcements by the new Trump government were less severe than expected.
Stocks rallied further, boosted by strong results in the tech sector and AI capital expenditure plans, along with President Xi’s meeting with top internet and tech firms.
Rising optimism around AI adoption led to strong rallies across various industries. We believe Chinese companies, particularly private-owned enterprises, have significant potential in downstream AI applications, robotics, and automation development.
US restrictions on advanced semiconductor chips propelled China’s AI disruption, forcing Chinese AI engineers to innovate faster and use limited computing resources more efficiently. DeepSeek took the tech world by storm by releasing two open-source Large Language Models (LLMs) said to rival the performance of US-dominated AI tools.
Despite challenges in tech infrastructure, POEs look poised to make clear progress. The success of companies such as DeepSeek show that POEs can narrow the gap between China and the US in AI. Similar to the mobile internet era, once China breaks out in AI applications, it may progress rapidly in tech usage.
Within Chinese equities, we see emerging opportunities in industrial automation and humanoid robotics, as well as the broader application of AI in transforming consumer experience – particularly within service-oriented sectors.
Outlook
Beijing’s pro-growth policy stance is clearer and more forceful now than previously, with support for domestic demand flagged as the top priority for 2025.
Additional monetary and fiscal support, along with structural reforms, will be key to building the ‘next China story.’ In this context, the National People’s Congress has set an ambitious target of 5% growth for the economy in 2025 and announced additional stimulus to achieve it.
Potential risks
The potential risks include insufficient domestic demand, pressures on private firms, and geopolitical tensions with the US. The relationship between China and the US will likely remain challenging in areas such as semiconductors and AI development.
In more detail:
- One of the primary risks is the possibility of insufficient domestic demand. Despite Beijing’s efforts to boost consumption, these measures may not be sufficient to offset the external drag from higher US import tariffs.
- Private firms in China may face significant pressure, particularly in the face of geopolitical tensions and economic uncertainties. The success of POEs in AI applications, robotics, and automation development is crucial, but they may encounter challenges due to tech infrastructure blockages.
- Geopolitical tensions, particularly in areas such as semiconductors and AI, could pose significant risks. The possibility of further tariff increases and US investigations into China trade practices add to the uncertainty. Tensions with the US could lead to further economic and market instability. The outlook is complicated by rising US recession risk.
- There is a risk that Beijing may not implement sufficient fiscal stimulus to support the economy. While additional support is expected, the effectiveness of these measures remains uncertain.
- The property market in China represents a sizeable portion of GDP and local government revenues. A sudden deterioration of the property sector could have severe economic repercussions and carry significant financial stability risks.
Investment perspective
We avoid investing in companies with large export exposure to the US and have been gradually reducing exposure to companies sensitive to slowing global growth.
Domestic stimulus is expected to support the valuations of Chinese assets, and we have slightly increased our allocation in industries that provide higher beta exposure upon policy announcements or the economy’s cyclical turnaround, including consumer Internet platforms, insurance, and selective supply-side consolidation opportunities.
We note that China’s corporate governance themes have attracted increased attention, with major changes in legal and regulatory frameworks. The 2024 Company Law brought significant changes in governance structure, and listing standards. ESG reporting is improving amid efforts from regulators and the government.
Our proprietary ESG score indicates that overall corporate governance of Chinese companies has been improving. The number of companies with positive governance scores rose by 63% in the past six months. Healthcare, information technology, and consumer discretionary sectors have shown long-lasting positive momentum.
Conclusion
Undemanding valuations, robust fundamentals, and structural long-term growth opportunities should help Chinese assets withstand near-term volatility.
Our long-term strategy remains focused on identifying investment opportunities in themes well-positioned to benefit from China’s structural changes: innovation, industrial upgrade, lifestyle change, and consolidation.
[1] Also see https://www.reuters.com/world/us/us-adds-16-entities-its-trade-blacklist-14-china-2025-01/
