China: Riding on supportive policies and tech optimism

Chinese equities in focus

The China onshore rally (stocks listed in mainland China) is gaining momentum. The Shanghai Composite Index recently climbed to a 10-year high. The onshore market refers to China A-shares – stocks issued by Chinese companies, denominated in CNY, listed on the Shanghai and Shenzhen Stock Exchanges, and open to foreign investors through the Stock Connect programme.

A-shares are catching up with H-shares (stocks issued by Chinese companies, denominated in HKD, listed on the Hong Kong Stock Exchange) that benefitted from AI-led optimism (Refer Figure 1). The term “offshore market” is often used synonymously with H-shares. The recent outperformance of A-shares reflects domestic sentiment and policy shifts. But the question is whether the rally is sustainable.

In addition to fiscal expansion, supportive measures by the PBoC, and adequate banking system liquidity, other drivers include expectations of corporate profit recovery due to anti-involution policies, improved global sentiment amid peaking tariff rates, and retail flows catching up since July – following a largely institutional rally since September 2024. This Viewpoint examines these fundamental factors in detail.

1.Anti-Involution

China’s anti-involution policy marks a strategic pivot in its economic model – aimed at curbing excessive, zero-sum competition and fostering more sustainable, highquality growth. Following the July 2025 Politburo meetings, China’s leadership is targeting:

1. Supply-side reforms – rationalising production, reducing subsidies for unprofitable firms, and phasing out weaker players.
2. Market regulation – curbing disorderly pricing and promoting fairer business practices.
3. Boosting domestic demand – encouraging consumption to absorb excess capacity and support profitability.

Earlier reforms focused on traditional industries such as steel, coal, and cement, aiming to reduce inefficiency and pollution. Current measures target not only these sectors but also rapidly growing industries such as solar energy, lithium batteries, EVs, and e-commerce. For example, hypercompetition in food delivery and ecommerce led to irrational discounting, fake reviews, and consumer fatigue. The government responded with pricing laws, platform regulation, and anti-monopoly probes – pushing online platforms toward quality growth. Similarly, in the pharma sector, excess competition in generic drugs prompted centralised procurement reform, innovation incentives, and IP protection – shifting players toward R&D-intensive models and encouraging consolidation. Prices of materials such as coal, steel, polysilicon and lithium have risen notably since July 1, following antiinvolution policies, which has boosted related sector shares (Refer Figure 2). Figure 3 shows some of the sectors with low net profit margins that could benefit from the anti-involution measures.

2.Tech-led optimism

With the US blocking the sale of cutting-edge semiconductor chips to China, leading Chinese tech firms are developing home-grown alternatives. AI firms are adapting their models for the new generation of domestically manufactured chips. Going forward, Chinese AI companies will rely more on domestic chips.

However, even the AI sector faces narrowing margins amid hypercompetition. Beijing is now planning to intervene to curb disorderly competition in the AI space. Key areas of interest in the tech sector are AI-related infrastructure, robotics, smart manufacturing, fintech, stablecoins and semiconductors.

3.Corporate earnings

Q2 2025 results were mixed, with the CSI 300 reporting weak earnings in Q2 2025 with a beat/inline/miss ratio of 37%/6%/57%. Three out of eleven sectors posted positive earnings growth including Financials, Consumer Discretionary and Communication Services, while the rest recorded declines. On the other hand, the HSCEI Index (Hang Seng China Enterprises Index) reported strong earnings with a beat/inline/miss ratio of 50%/6%/44%. The outperformance was largely driven by Financials, Consumer Discretionary, Communication Services and Healthcare sectors. Refer Figures 4 and 5.

4.External environment improving

Exports remained resilient despite tariff pressures due to frontloading (Figure 6). While exports to the US dropped sharply after Liberation Day in April, this was offset by higher exports to ASEAN and the EU (Figure 7). The impact of tariffs is expected to be more pronounced in H2 2025. Tariff risks have likely peaked, as a potential US-China summit on the sidelines of the APEC meeting in South Korea (October 31) could show positive signals.

5.Supportive policies and wealth effect

1. Recent pro-growth measures include:
2. Interest subsidies to support consumption and service supply.
3. Free pre-school education (starting with K3) to ease childcare burdens.
4. A new Xinjiang–Tibet railway (RMB300–360bn investment over 10 years), following a mega hydropower project announced in July.
5. Expanded social security coverage for low-income workers.

Golden Week (October 1–7) will be a key gauge of domestic sentiment, as will Singles’ Day (November 11), the world’s largest e-commerce event. With trade tensions easing, Chinese investors are shifting from deposits and real estate toward equities amid record-high household savings (Figure 8) and low deposit yields. Property sector weakness, an aging population, and inadequate social security could further divert funds into equities.

6.Tourism rebounding

Domestic tourism has recovered to pre-pandemic levels (Figure 9). Households are spending more on services such as tourism, even as overseas travel remains subdued. Authorities have launched discounted personal consumption loans for services, including tourism, and expanded visa-free access for the nationals of dozens of countries – fuelling inbound travel. Southeast Asian bookings have already surpassed pre-pandemic levels.

7. RMB stabilising

The renminbi (RMB) is showing signs of stability and mild appreciation in 2025 after depreciating from 2022 to 2024 due to capital outflows, weak domestic demand, and housing market stress. Authorities continue to tightly manage the RMB to avoid sharp depreciation and global market disruption. We expect the RMB to remain broadly stable as structural headwinds (deflation, weak consumer confidence) are offset by de-dollarisation, pro-growth policies, and progress in US-China and EU-China trade talks. We expect four additional Fed rate cuts in the next 12 months, which should be supportive of the RMB. The increasing likelihood of Fed rate cuts helps to lower equity risk premium and is favouring EM equity inflows. Within EM, China has seen massive inflows over the last 3 months.

Risks.

1. Property market weakness – New home prices (-0.3% MoM, -2.8% YoY), residential property sales (-4.1% YoY), and property investment (-12.0% YoY, Jan-Aug) continue to decline, especially outside Tier 1 cities.
2. Local government debt – Provinces that can build competitive advantages in strategic industries (EVs, pharma, aviation) will be better positioned to expand their tax base sustainably.
3. Deflationary pressures – PPI remained deeply negative at -3.6% in July despite anti-involution measures. CPI was flat YoY but rose 0.4% MoM, driven by services and industrial consumer goods. Sustained inflation has yet to emerge, indicating a tentative recovery.

Events to watch out for

• Golden Week (October 1-7) data to gauge domestic consumer sentiment – travel, retail, hotel bookings etc.
•  Fourth Plenum (2nd half of October) 15th Five Year Plan covering 2026-2030.
•  Asia-Pacific Economic Cooperation/APEC Summit (October 31).
• US-China tariff deal (November).
• Singles’ Day (November 11) the world’s largest ecommerce event to gain insights on China’s consumer confidence.
• Central Economic Work Conference/CEWC (December).

Top sectors

• IT (AI capex & tech localization, chip self-sufficiency, export demand for automation tools).
• Communication services (Entertainment and digitalization).
• Consumer Discretionary (Electronics and EV demand driven by trade-in schemes, tourism rebound, pent-up demand from savings).
• Industrial (Smart factories, global reshoring of production).
• Green energy (Supportive government policies, continues to attract domestic and foreign capital).

Valuations

Historically, H-shares have traded at a significant discount to A-shares due to global risk aversion, geopolitical concerns, and tighter liquidity in Hong Kong. However, the rally in H-shares triggered by the DeepSeek event has narrowed the A/H premium. The offshore market is largely dominated by major internet companies, banks, property firms, utilities, and energy giants, whereas the onshore market is more diversified and better reflects emerging sectors such as AI, factory automation, biotech, and consumer electronics. Refer Figure 10. In terms of investor base, the offshore market is primarily driven by global institutional investors, with mainland Chinese investors accounting for approximately 25% of daily turnover in Hong Kong. By contrast, domestic retail investors represent around 70% of daily turnover in the onshore market, with foreign participation below 5%. The DeepSeek event also triggered a surge in Southbound flows via the Stock Connect programme, as domestic investors sought exposure to the AI success story. In H1 2025, Southbound flows approached USD100bn – nearly matching the full year total for 2024.

Recommendation 

We suggest buying on dips to ride the China tech and policy wave, while also enhancing portfolio diversification with exposures to both China A and China H markets.