China Equities: Tracking the Turn from Rally to Resilience

After a strong year for China stocks, could improving fundamentals and accelerating earnings growth deliver more for investors?

In a year that surprised skeptics, China equities delivered strong performance in 2025, buoyed by improving corporate fundamentals, strengthening earnings and policy reforms. China enters 2026 on solid ground for further gains, though it will take a selective approach to tap into the next stage of recovery.

Offshore China equities and “A shares”—shares of mainland Chinese firms that trade on two major exchanges—have delivered two consecutive years of double-digit gains following an extended period of underperformance. The broad-based recovery has incorporated diverse corners of the economy. Over the coming year, we believe the conversation around China won’t be whether the world’s second-largest economy is investible, but rather how best to allocate to China.

Earnings Will Be the Key Driver

Over the long term, equity market returns are driven by earnings. That helps explain why Chinese stocks struggled for much of the past decade as earnings-per-share (EPS) growth stagnated. Some of this weakness was cyclical, but there were also structural elements at play. China has been going through a familiar East Asian growth pattern—export-led expansion, rising wealth, a property boom and then a correction. Korea and Japan lived through similar chapters. These transitions are painful, but they are not unique or permanent.

China equities have also been hindered by poor price discipline, deflation and overcapacity—not to mention high issuance levels that diluted EPS growth. Fortunately for investors, dividends and buybacks have become more common, and net issuance has turned negative. It’s early, but directionally, this matters. And in a policy pivot, China has put the brakes on “involution”—the draconian price cuts previously employed to stimulate consumer spending and economic growth. Anti-involution is part of China’s 15th Five-Year Plan and an underappreciated market driver, in our view.

In aggregate, these shifts have had a positive effect on margins. We think return on equity may have reached an inflection point, with consensus EPS growth estimates for the broad-market CSI 300 Index outpacing the S&P 500 and MSCI EAFE (Display). These upbeat expectations are anchored in genuine earnings recovery rather than market sentiment—a marked change from previous years.

Household Savings a Potential Tailwind

Meanwhile, the level of untapped savings is supportive, too, in China’s retail-heavy stock market. Chinese households have accumulated significant savings since 2021, due primarily to reduced property purchases. With bank deposit rates low and bond yields compressed, equities stand out as perhaps the most viable risk asset. Chinese consumers have taken note, driving the MSCI China A Onshore Index up 26.1% in 2025.

To be sure, the rally is still early and its progression won’t likely be linear. The latest macro data point to an economic recovery in China that will be uneven at best. Still, we see early signs of stabilization in recovering exports, industrial upgrades and travel-related areas such as hotels and Macau gaming. 

Foreign Positioning Is Light and Valuations Are Attractive

Despite the rebound in China equities, many global investors have scant allocations to China. With the Fed poised to cut rates and the US dollar under pressure, global investors are seeking alternatives to dollar-denominated risk assets. Europe and Japan have absorbed some of that reallocation, but China remains under-allocated (Display). If more global investors begin shifting more assets toward China, it could be a long-term catalyst for the stock market.

Light allocations in China are reflected in valuations, with A shares particularly cheap even after last year’s rally. As of 2025 year-end, the CSI 300 Index of onshore Chinese stocks was trading at 13.9 times forward price to earnings. While that’s above its historical average, it’s below prior peaks and represents a sizeable discount to the S&P 500 and MSCI EAFE. This leaves plenty of room for multiple expansion as earnings visibility improves—particularly given the weak US dollar, which can support emerging-market assets (Display).