2025 – China’s comeback year

Please find below our latest thoughts on China:

• Not only have both China A and H markets each returned more than 25% year to date (USD)¹, but more broadly China has demonstrated its technological development in many of the world’s future growth industries.
• Initially, it was the release of DeepSeek’s model, timed to coincide with President Trump’s inauguration, that showed how China’s AI capabilities had advanced more quickly than was widely appreciated.
• However, through the course of this year, it has also become clear that as well as AI, China is also developing fast in a range of other technologies.

• Some of these are already well-known – think electric vehicles, high-speed rail and renewable energy. Others, such as battery technology, humanoid robots, and the burgeoning biotech space, have increasingly come on to investor radars this year.
• Just one data point to give some perspective. In 2024, China invested an estimated USD 940 billion in clean energy capex, covering areas such as renewables, electricity grids and energy storage. This is far in excess of its estimated total AI capex of around USD 100 billion over the last year.² 
• This is not to say that China does not still have very significant economic challenges. It does. Domestic demand remains weak. Property prices continue to edge lower.
• We do not think this is likely to change much, at least for the time being. With the focus remaining on technological development and reducing reliance on Western supply chains, there is little incentive to reallocate resources to the housing market so long as the slowdown does not pose a more systemic risk.
• With China’s 5-year credit default swaps – the cost to insure against a default on Chinese sovereign debt over a five-year period – back at pre-Covid levels³, the market is not indicating any property-related stress.
• As such, one of the lessons we can take from the last year when it comes to investing in China is that the “macro” is not the “market”.
• Just as China equities often did not deliver great returns when there was eye-catching GDP growth, we also do not see the current environment of slower headline growth being a barrier to future equity upside.
• This is especially the case given how the structure of China’s equity markets has evolved. The MSCI China A Onshore Index has around a 25% weighting in the tech sector. In contrast, real estate accounts for less than 1%.⁴
• Indeed, the range of bottom-up opportunities (as opposed to top-down factors) is one of the main reasons for our optimistic view on the outlook for equities. Other positive elements include the domestic liquidity situation and valuations.

• In terms of liquidity, cash levels in China are high. There is an estimated USD 7 trillion of excess household deposit savings accumulated since the end of China’s Covid-related policies.⁵ We expect these to be incrementally deployed into equities, particularly given the low interest rate environment and muted outlook for other investment options.
• There is also a push to encourage longer-term “patient” capital into China A markets. Insurance companies, for example, are being encouraged to invest 30% of new premiums into equities, significantly higher than current levels.⁶
• Combined with ongoing corporate share buybacks and limited equity issuance, we expect the supportive equity demand/supply environment to continue, especially in China A markets.
• While valuations are no longer as depressed as they once were, the equity risk premium remains above long-term average levels.⁷
• And to give some sense of longer-term potential, the market cap of the largest listed Chinese company is USD 700 billion.⁸ This is less than half of any of the “Mag 7” stocks.⁹
• Overall, therefore, our base case for 2026 is for another year of decent returns for China equities. And in terms of bull/bear scenarios, the potential for large gains looks to us to be higher than the risk of substantial losses. This is especially the case for China A-shares, where the government has consistently backstopped the market to cushion volatility over the last couple of years.

¹ Source: Bloomberg as at 12 December 2025
² Source: Financial Times, 13 December 2025
³ Source: Bloomberg as at 12 December 2025
⁴ Source: IDS GmbH, Allianz Global Investors as at 30 November 2025
⁵ Source: Wind, HSBC as at 31 October 2025
⁶ Source: UBS as at 26 November 2025
⁷ Source: Allianz Global Investors, Wind, Bloomberg, as at 30 November 2025
⁸ Source: Bloomberg as at 12 December 2025
⁹ Source: Financecharts.com as at 15 December 2025