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While Chinese stocks had a painful start to 2025, the equity markets are now soaring on optimism surrounding technology innovation. The Hang Seng Index has surged by 26% since the beginning of 2025, while the Hang Seng Tech Index has climbed 38%*. But what is the China equities outlook from here?
Asset managers attribute the current rally largely to the advancement of AI in China. Despite the United States’ efforts to limit the development of advanced technology in China, the world’s second-largest economy has demonstrated its ability to innovate. The release of DeepSeek sparked a wave of optimism for Chinese technology stocks.
Nicholas Yeo, Director and Head of Equities China at aberdeen, noted that the changed messaging from Bejing on technological innovation, as heard at the recently concluded ‘Two Sessions’, is encouraging and sends a strong signal in support of innovation and the private sector. “With valuations of the internet sector cheap relative to US counterparts, alongside the support of the authorities to boost the nation’s AI capabilities, we think this remains a very attractive opportunity for investors,” Yeo said in a note.
The introduction of DeepSeek’s R1 AI models has significantly boosted market confidence in the AI capabilities of Chinese tech firms. The launch changed the race dynamics, and S&P Global Ratings says this development will allow Chinese internet companies to quickly adopt robust and cost-effective AI models. “This will be a boon for the many Chinese firms without access to leading-edge chips,” a recent report said.
Companies like Tencent and Baidu have already integrated DeepSeek’s AI models into their services, raising expectations for enhanced earnings in the consumer digital services sector.
Fidelity International also sees significant opportunities arising from China’s focus on technological innovation. The government’s commitment to nurturing advanced manufacturing and technologies such as AI and robotics—including plans to establish the National Venture Capital Guidance Fund to support tech start-ups and an expansion of the central bank’s relending quota for tech investments—is expected to revitalize the private sector. “We believe a revitalised private sector could bolster industries like electric vehicles and related supply chains, AI-enabled devices, and humanoid robotics, and unlock long-term potential for other segments including biopharmaceuticals,” a recent insight by the asset manager opines.
HSBC sees an improvement in risk appetite that is benefiting China’s stock market. “The trigger is enthusiasm over tech innovation and the Chinese government’s policy pivot towards consumption and a friendlier stance on the private sector,” says Willem Sels, Global Chief Investment Officer, HSBC Global Private Banking and Wealth.
Sels expects more investment, especially in tech, and lower regulatory risk. This should help boost valuations, “even though we do not expect a quick acceleration in earnings or GDP growth,” he adds.
China equities outlook – correction coming?
However, not all are optimistic about China’s equity market. Bank of America (BofA) strategists just warned in a note that the recent pace of gains equals those seen in 2015 – before the market plummeted.
“There are quite some fundamental similarities between the current cycle and 10 years ago, with the economic rebalancing cycle and policy cycle,” the BofA note says. “Nonetheless, a multiple-expansion-driven rally could be vulnerable.”
China is facing domestic macro challenges and external geopolitical uncertainties. The property market remains a major drag on the economy, but domestic demand is showing signs of recovery. Additional uncertainties stem from US trade policies.
However, China is working on improving the economic condition. At the ‘Two Sessions’, the annual meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) that just concluded on March 11, Bejing set the GDP growth target to around 5% and the inflation target to 2%. Furthermore, the budget deficit was raised to 4%, up from 3% in 2024.
Additionally, China has just announced a ‘special action plan’ on March 16 to increase consumer confidence. Amongst others, the plan targets wage growth which has slowed since the pandemic.
“Many households have experienced a negative wealth effect given the performance of property and equity markets over the past few years,” explains Lynn Song, Chief Economist, Greater China at ING.
“The plan takes aim at both headwinds. On the wage side, it calls for ‘reasonable wage growth’ and steps to ‘scientifically and reasonably’ improve the minimum wage. […] On the wealth effect side, the plan calls for multiple measures to support the stock market, increasing bond market products for retail investors and other financial market reforms,” Song adds.
The economist expects China’s consumption growth to recover to mid-single-digits overall in 2025.
HSBC does not see a quick economic turnaround to happen since the property market recovery remains slow. “Investment in Chinese real estate continues to shrink by about 10% p.a., but investment in the new economy is growing at around 20%, and this should continue as China works on its priority sectors and increasingly incorporates AI. Perhaps just as important is the recent policy pivot towards a friendlier and more supportive stance to the private sector,” Sels opines.
*as of March 19, 2025.
