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Chinese equities are experiencing a long-awaited turnaround this year. The breakout success of DeepSeek has sparked fresh enthusiasm for Chinese innovation and reenergized the markets. Even as the escalation of US trade tariffs caused a sudden pause in the rally, momentum quickly returned when both countries agreed to resume talks and Beijing stepped up efforts to strengthen its capital markets. For the first seven months of the year, China stocks, as tracked by MSCI China, delivered a return of more than 25%.¹

Given these developments, why are so many investors still waiting on the sidelines? In our view, the current environment is highly favorable — making now an excellent time to consider participating in the China markets.

Since April, negotiations between China and the US have had many highs and lows. After three rounds of official talks, the mood is generally constructive, though there is still a need for more concrete outcomes in the future. The initial anxiety over trade issues has substantially eased, but companies remain circumspect, as sudden policy changes continue to create uncertainty and difficulty for planning.

In the second quarter, China posted a GDP growth rate of 5.2%.²Â It exceeded expectations, especially given the ongoing tariff pressures from the US. Much of this performance can be attributed to businesses accelerating trade shipments and consumers maintaining spending. However, a bigger factor was likely China’s strategic shift to diversify its overseas production and export markets.

While exports to the US dropped sharply initially — by 21% in April and 35% in May year over year — China managed to compensate by increasing shipments to Southeast Asia and, to a lesser extent, Europe.³ As a result, total exports actually picked up speed in June. 

China’s economy right now is a mix of strengths and challenges. Yet, despite these mixed signals, Chinese equities have climbed higher — perhaps not in spite of but because of it. When the economy is strong, Beijing often steps up oversight and regulations to mitigate risks from overexuberance or overheating, as we’ve seen with interventions in the property and technology sectors in recent years.

Today, the situation is quite different. With more subdued growth and tariff uncertainty, Beijing has shifted its focus to supporting the equity markets. After the initial tariff shock, authorities took active steps to reinforce and stabilize capital markets. The so-called ‘national team’ increased its buying of listed shares through ETFs, helping to shore up prices. In addition, many A-share companies are using funds from the People’s Bank of China’s (PBOC’s) relending facilities for share buybacks. While we don’t have a lot of expectations on the policy front, investors should not rule out a positive surprise that could lift market sentiment.

But there is still a great deal of hesitation among investors about re-entering China’s markets. While we have observed an uptick in confidence among global institutional investors — especially those focused on emerging markets — overall capital flows are still sluggish. Most of the recent market rally has been fueled by domestic investors, not by new international inflows.

Global investors continue to be tentative for several reasons. The need for broad, structural reforms to boost consumption remains unmet, and the property market has yet to find stability. Although these factors mean China still faces real challenges, we do not believe they should discourage investors from considering opportunities in the country.

Additionally, retail investors have yet to return to the market in large numbers. This suggests that the stock market is nowhere near the peak of a bull cycle and still has a lot of room for growth. Historically, bull markets are often born out of widespread hesitation — so we believe there is real potential for stocks to rally from current levels.

Liquidity is another key factor behind our positive outlook for China markets. In periods when economic growth is lukewarm, what often drives the markets are capital flows. Currently, IPO and fundraising activity are strong. With valuations at compelling levels, we anticipate that even more liquidity will flow into the markets in the near future.

For perspective on how beaten down Chinese stocks are: US equities are currently still trading at roughly twice the valuation levels of their Chinese counterparts. We believe many companies are fundamentally undervalued right now, which gives the market further room to rise.

Our investment approach has focused on identifying companies with distinctive advantages that are difficult to replicate. We seek out businesses with differentiated products and strategies, believing that true profitability comes from doing things differently — and better — than the competition.

For this reason, among Chinese technology companies we prefer companies that have achieved or will achieve clear market leadership, particularly in areas like online gaming. These leading firms not only dominate in China but are also well positioned to compete, and potentially win, on the global stage.

We are also enthusiastic about biopharmaceuticals companies with innovative drug pipelines, especially those that have expanded internationally and now supply the US market. Companies that focus solely on domestic sales tend to face tougher pricing pressures, while those with a broader international footprint can tap into larger growth opportunities aboard.

It’s also important to note that drug development and manufacturing costs in China are significantly lower — roughly one-sixth of the costs in the US. This cost advantage translates into greater efficiency and competitiveness. Recognizing that, many multinational corporations are now outsourcing research and development work to Chinese contract research organizations (CROs). In fact, global companies are increasingly acquiring late-stage drugs developed in China, with US firms often driving these business development deals to capitalize on China’s strengths in innovation, affordability and scale.

In summary, we are seeing something of a renaissance in Chinese equities. We believe this could be a good time to consider investing in the differentiated advantages of Chinese companies and becoming part of this turnaround story.

¹. Source: Bloomberg, data as of 25 Jul 2025.
². Source: National Bureau of Statistics, China. Data as of 14 Jul 2025.
³. Source: General Administration of Customs, China. Data as of 14 Jul 2025.