We believe the outlook is bright for the world’s second largest sharemarket, with a potential outperformance of US stocks this year and bright spots like the return of Jack Ma and Alibaba drawing investor attention to its stock market.
There are several supports in place for the sharemarket and its ongoing rally. China is ramping up policy support through trade programs, equity market initiatives and with US$10 trillion in consumer bank deposits; China can mobilise its elevated savings rates to encourage activity.
Notably, economic growth is robust. Recent headline economic indicators have surpassed expectations, with gross domestic product (GDP) for the first quarter of 2025 expanding by 5.4 per cent year-over-year (versus consensus of 5.2 per cent). We believe the economy can also absorb some of the adverse effects of Trump’s tariffs, with Aberdeen Global Macro Research estimating 4.2 per cent GDP growth for China this year.
While a turnaround in China’s depressed property market is proving elusive, the recent reduction in tariff rates between China and the US has buoyed its sharemarket and economic prospects. Other factors support growth. Chinese policymakers were already easing monetary policy ahead of this year’s trade war with the US and are poised to implement additional measures to bolster the economy.
Monthly activity data for March 2025 also surprised on the upside, helping key metrics post robust quarterly growth rates. Industrial production expanded by 7.7 per cent year over year in China (versus consensus of 5.9 per cent), while retail sales grew 5.9 per cent, more than the 4.3 per cent expected by consensus. These are good signs for the economy. In terms of real estate, our best guess remains that the drag from real estate could be getting close to complete, but the risk of a substantial inventory overhang of housing could prolong this headwind to economic growth.
Trade tensions are the biggest risk
Recent tariffs from the US have seen a partial reprieve, yet non-tariff measures continue to escalate. China has tightened its restrictions on seven rare earth metals, effectively suspending their exports; Trump accused China of having “reneged” on its plans to buy Boeing aircraft, following media reports that China was going to halt deliveries and orders. The US administration also placed new restrictions on the export of Nvidia’s H20 computer chips to China. Even if a deal is struck, without swift action or the introduction of a more comprehensive pause, avoiding a larger economic shock may prove challenging with such trade restrictions.
Yet the increasing likelihood of economic decoupling with the US has made Chinese stock markets relatively resilient to the global market sell-off compared to other global stock market indices. This resilience was particularly evident last July when Chinese markets showed minimal reaction to a sell-off that significantly impacted the Nikkei 225 Index, which fell 12 per cent in a single day, as well as Magnificent 7 with 17 per cent off its highs at one stage. The situation is likely to be similar this time around should global markets sell off, supported by the Chinese government’s support and attractive stock market valuations. The Chinese onshore stock market is currently trading below its 10-year average. We believe further stimulus measures could act as a catalyst for stock prices, and we also see several bright spots in the Chinese stock market.
Rising in AI and broader technology
China’s advances in Generative AI are significant. For good reasons, there are numerous AI beneficiaries in China, from internet platform to EV makers to domestic IT hardware names. Additionally, we believe high-quality companies with minimal trade exposure to the US should provide investors with some defensiveness amid anticipated market volatility.
While Taiwan and South Korea have long been at the forefront of the global technology boom, especially in semiconductors, we are also seeing China rising. As AI and the broader tech sector advances, China will remain a key beneficiary given its role in the global tech landscape.
Aside from that, further stimulus spurring increasing consumption by its massive population will benefit consumer-focused companies. This not only captures a middle class that is growing in size and spending power, but also new ways of consuming with a priority on upwardly mobile consumer experiences and digital products over physical goods bought in brick-and-mortar stores.
China has significant leverage in negotiations with the US, which will diminish the impact of trade tensions. It boasts a dominant industrial base and leads the world in several key areas, including renewable energy, rare earths refining and electric vehicles. It has a competitive tech ecosystem and a vast domestic market. It has both the capacity and willingness to make substantial foreign direct investments, giving it significant leverage should the US try to peel off trading partners. The US is dependent on China for a wide range of products; but many Americans might have to celebrate this year’s Fourth of July without fireworks, as Walmart’s shelves could be empty.
Despite ongoing trade tensions and global uncertainty, China is in a strong position for steady economic and market growth. Investors should look past short-term issues and focus on the long-term changes shaping China’s economy. With low stock valuations, solid government backing and fast-growing sectors, Chinese equities offer a strong long-term investment opportunity.
Nicholas Yeo, head of China equities, Aberdeen Investments
