George Efstathopoulos, Portfolio Manager, Fidelity International, comments:
“In recent years, many investors have asked whether China remains investible. Between the property downturn, regulatory tightening, and geopolitical frictions, global capital turned away from Chinese equities in favour of perceived safety elsewhere. Yet markets have a way of challenging consensus, and China’s market performance this year suggests a quiet but meaningful shift.
“China has proven more resilient than many had expected. Earnings stabilised, corporate reforms accelerated, and confidence is slowly returning. Flows typically follow stock market performance and earnings, and China is now delivering both. For investors, diversification remains the cornerstone of portfolio construction and China now offers not only diversification but also innovation. As such, it is regaining its status as an indispensable component within Asian and emerging-market allocations, precisely at a time when foreign investors remain structurally underweight Chinese equities.
“Perhaps the biggest surprise this year has been China’s resilience. Growth has held up in the face of tariffs and soft global demand, and the government has managed to navigate its relationship with the US more deftly than most expected. In many respects, China has achieved more in negotiations while offering less, shifting dynamics and bargaining power.”
Rebalancing China’s two engines
“China’s economic model has long relied on two engines: exports and domestic consumption. The former has been operating in overdrive, while the latter continues to lag. To sustain growth, China is in the process of rebalancing towards domestic demand. The signals from the Fourth Plenum suggest policymakers are fully aware of this need. Fiscal policy remains the key. China holds the fiscal keys to help fight its own deflationary forces, rebalance its economy and create more sustainable growth domestically – and by doing so, boosting status as a key trading partner to the rest of the world, which would in turn also elevate the Chinese Yuan’s role in the world stage.
“For markets, the next phase of the China rally may hinge on inflation dynamics. The return of moderate inflation would signal not just cyclical normalisation but structural health. For years, investors have drawn parallels with Japan’s deflationary episode, fearing a similar “lost decade”. Yet recent data points have been more encouraging. Core inflation has been rising since May, while service-sector inflation – from recreation to healthcare and transport – is broadening. Sequential producer price inflation has improved for three consecutive months, reflecting early success in addressing overcapacity and anti-involution can help earnings broaden beyond tech sector. A convincing exit from deflationary concerns could be the catalyst for further re-rating.”
Looking ahead
“As the narrative on China continues to shift, foreign flows are likely to follow. Yet perhaps the more powerful force lies within China itself. With one of the highest household savings rates globally, China holds a vast pool of untapped domestic capital. Historically, property was the preferred savings channel, but with the property market undergoing structural adjustment, equities may increasingly become a credible alternative.
“Meanwhile, government policies aimed at strengthening the social safety net could gradually reduce the need for precautionary savings. If households begin to deploy even a fraction of their deposits into the equity market, the implications for valuations could be profound. Opportunities span both onshore and offshore markets. Offshore equities, with their heavier weighting in technology and AI, are benefiting from the innovation theme and China’s relative strength in energy infrastructure – a key advantage in an electrifying global economy, while valuations remain much lower than global peers. Onshore markets, which are more exposed to domestic consumption, could be the main beneficiaries if fiscal stimulus surprises to the upside. Mid-caps, in particular, offer high sensitivity to domestic demand recovery. While anti-involution could drive corporate margins and profitability higher, benefiting sectors such as EVs, an industry China has come to dominate worldwide.
“Looking into 2026, the foundations are in place for a sustained rally. China’s macro and corporate resilience, coupled with the gradual return of inflation and a more supportive policy stance, suggest further upside potential. The combination of improving fundamentals, policy pragmatism, and renewed investor confidence marks a distinct departure from the cycle of hope-driven rallies of recent years. China’s equity market is in a bull phase that foreign investors have yet to fully appreciate. For those willing to look beyond the lingering skepticism, the risk-reward balance has shifted decisively. In my view, dips remain opportunities to buy, not to sell. China has turned the corner – not through hope, but through resilience, innovation, and policy conviction.”
