12 Mar 2026
As we enter the Year of the Horse, our investment team assess the risks and opportunities facing investors across China’s markets. With the Year of the Fire Horse symbolising energy, ambition and endurance, we examine the macro and micro factors that are combing to strengthen the investment outlook for Asia’s largest economy.
Despite a complex domestic backdrop, China’s macro outlook for 2026 is becoming more balanced and resilient, underpinned by policy stability and continued strength in key growth engines. In the absence of a decisive policy pivot, China’s dual-track growth pattern characterised by softer domestic demand, alongside a strong export engine, is expected to persist.
Real GDP growth is likely to meet or exceed the IMF’s current projection of 4.2%. However, for investors, the focus this year should increasingly tilt toward nominal growth, which will be crucial in assessing earnings potential across sectors.
While controlled stabilisation remains the base case for China’s macro environment, early indications of policy support for domestic demand increase the probability of a reflationary outcome in 2026. Importantly, the risk of a severe slowdown appears limited, given the external environment remains broadly supportive and the property sector is showing further signs of stabilisation.
Deflationary pressures are expected to persist in the near-term, as a durable recovery in domestic consumption has yet to fully materialise. For now, we believe real growth continues to be driven primarily from the supply side.
Fiscal policy is expected to remain supportive but measured in 2026, with the budget deficit likely to remain around 4%. Meanwhile, the People’s Bank of China (PBoC) is expected to maintain a moderately accommodative stance. With inflation pressures subdued and growth indicators still soft, the PBoC is likely to pursue a measured easing cycle, balancing growth support with currency stability, employment objectives and banking system net interest margins.
Policymakers continue to advance a measured agenda centred on consumption support, housing market stabilisation and structural reform. This is helping to lay the groundwork for a more durable recovery.
That said, key risks persist, particularly around a subdued housing recovery, geopolitical uncertainty and lingering deflationary pressures. Nonetheless, consistent policy implementation and improving earnings visibility are likely to underpin domestic liquidity and attract foreign investors to Chinese assets.
Compared to 12-18 months ago, equity valuations across both onshore A-share and offshore Chinese equity markets have re-rated modestly but remain reasonable relative to historical averages and global peers. Notably, the MSCI China Index outperformed both US equities and global markets in 2025, driven by innovation-led themes, following the announcement of DeepSeek’s AI model at the beginning of 2025. Momentum has continued, reflected in several Chinese AI and technology listings in Hong Kong towards the end of 2025, which attracted strong investor interest.
The key question now is whether earnings delivery can validate recent market strength, as extrapolating momentum without a clear follow-through from fundamentals warrants a degree of caution.
An improving macro backdrop and new growth drivers favour growth-oriented sectors. Technology and innovation remain compelling, extending beyond AI into robotics, autonomous driving, next-generation mobility and advanced manufacturing. Structural reforms, including capital market liberalisation, supply-side modernisation, anti-involution measures - which are designed to reduce unproductive competition and improve profitability - and support for private enterprise, are improving capital allocation and fostering innovation-led growth.
Consumption remains central to China’s long-term growth strategy. Near-term household spending is subdued due to cautious sentiment, but underlying conditions are improving. As housing stabilises and employment strengthens, consumer confidence should recover, unlocking savings and pent-up demand. This reinforces consumption as a pillar of sustainable growth and creates opportunities to access leading consumer companies at attractive valuations. Policy support for services, wellness and experience-based consumption is accelerating structural divergence, with clear winners emerging in premium services, healthcare, online platforms, leisure and experiential retail.
China’s macro backdrop of controlled stabilisation, subdued inflation, and ample onshore liquidity, supports sovereign, financial, SOE and quasi sovereign credit, reinforcing a stable environment for investment grade names. At the same time, ongoing property sector stress and weak private sector confidence continue to drive pronounced credit divergence, leaving high yield firmly carry driven and dependent on name specific fundamentals. Non-property high yield sectors such as financials, utilities and gaming offer more resilient cash flow profiles, while property exposure must remain tightly curated and focused on state linked or top tier issuers with visible refinancing paths.
Overall, China fixed income remains supported by strong domestic liquidity, improving technicals, and declining default rates, but elevated dispersion and historically tight valuations argue for selective positioning, short to medium duration, and an emphasis on income generation through high quality investment grade and carefully chosen high yield opportunities.
China remains a fertile hunting ground for fundamental investors. We are encouraged by the fact that we continue to identify opportunities to invest in companies with scalable growth potential, sustainable competitive advantages and strong management execution.
One area of focus is consumer-related industries, where expectations and valuations remain depressed, but opportunities are emerging from shifting consumption patterns. Domestic champions with strong brands and efficient distribution are gaining market share in select categories such as travel, jewellery and sportswear, where long-term under-penetration trends continue to play out.
Industrials and technology are other notable areas of opportunity, reflecting China’s growing competitiveness across advanced manufacturing, automation, robotics and AI-related infrastructure. The success of DeepSeek should not be viewed as an isolated event, but a positive outcome of sustained R&D investment and broader technological innovation. Companies like Zhongji Innolight illustrate China’s progress here. As a leading supplier of optical interconnect solutions for data centres, the company is benefiting from strong demand for high-speed optical modules as AI-driven capacity expands, underpinned by deep customer relationships and sustained R&D investment.
As innovation across China’s technology ecosystem continues to broaden, Chinese companies have achieved scale in supplying critical components and materials to sectors such as renewable energy and electric vehicles. Companies like Minth Group provide exposure to automotive exterior metal trim and global EV adoption. Its strengths in aluminium and advanced plastics, combined with a vertically integrated manufacturing model, position the company to serve both traditional and new energy vehicles, particularly in overseas markets where demand for lighter battery and chassis structures is increasing.
Another growing trend is improved corporate governance and capital discipline. Our engagement with companies around shareholder returns has intensified, and progress has been tangible. Higher dividends and share buybacks are becoming more common, supported by favourable policy signals but, more importantly, by stronger balance sheets and improved financial management.
Valuations remain a supportive backdrop. Following the recovery in 2025, Chinese equities have partially normalised but continue to trade at a meaningful discount to global peers. In an environment where sentiment can shift quickly, dispersion between winners and losers is increasing, reinforcing the importance of a disciplined, bottom-up approach to stock selection.
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