China’s markets: My opinion on investing in the current equity markets

Are China’s markets finally turning the corner, or is this just another short-lived rally? Trading expert Van Ha Trinh analyzes the latest developments in China’s equity markets, from stimulus measures to AI-driven growth, to help investors navigate 2025.

The Chinese equity markets experienced a significant rebound from their late-2024 trough, which marked the lowest level since mid-2019. The price-to-earnings (P/E) ratio also reached a decade low in 2024, but has not increased substantially since then. The Chinese economy has faced persistent challenges, including disinflation and a recession in the real estate sector, a key investment instrument for Chinese retail investors, typically accounting for 40–60% of their portfolios. 

Despite these headwinds, the Hang Seng China Enterprises Index (HK50) has risen over 23% YTD, driven by government stimulus measures and renewed enthusiasm for artificial intelligence (AI) following the launch of the Deepseek AI chatbot.

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China’s economic landscape

Disinflationary pressures persist

China’s economy is contending with an aging population and rising labor costs, compounded by unaffordable housing prices that have contributed to a declining birth rate. These factors raise concerns that China could face a prolonged period of stagnation similar to Japan’s “lost decades.” Disinflation has deepened due to overcapacity and weakened consumption, the latter a result of diminished wealth effects. The Producer Price Index (PPI) has remained deeply negative for nearly three years, while the Consumer Price Index (CPI) has hovered around 0% for about two years, with only a marginal 0.1% increase in July. These long-term pressures have created uncertainty within China’s equity markets, as investors weigh risks against potential stimulus-driven gains.

China still faces disinflation, with CPI flat and near zero, while PPI has been deep in negative levels since mid-2022 due to overcapacity.

Real estate market remains weak

The real estate market, a traditional investment avenue for Chinese households (comprising 40–60% of portfolios alongside gold and deposits), continues to struggle. The sector’s downturn has significantly eroded the wealth effect, prompting consumers to cut back on spending and dampening sentiment in China’s equity markets. Despite aggressive government stimulus since late 2024, including “bazooka” measures, property prices have continued to decline, albeit at a slower pace. The market remains in a stalemate, with transaction volumes and prices resuming their downward trajectory after a brief stabilization. Stronger government intervention is needed, not only to support real estate but also to stimulate consumer spending and avoid the pitfalls experienced by Japan.

China’s housing prices dropped further, with the price of completed homes in 70 major cities falling 0.3% in June, and all four tier-1 cities saw their used-home values drop at least 0.5% from a month earlier, despite a huge government stimulus.

Export tariffs pose additional headwinds

High tariffs on Chinese exports to the US—totaling 55%—and similar measures targeting transshipment through countries like Vietnam (up to 40%) have become significant barriers to economic growth. Although the US is no longer China’s largest direct export market, it remains the most important when indirect trade is considered. These tariffs are likely to increase prices for US consumers and dampen demand, potentially undermining one of China’s key GDP growth drivers. Tariff pressures, while external, play a crucial role in shaping investor confidence across China’s markets.

A detailed breakdown of the trading impact of tariffs can be found in the corresponding Exness Insights deep dive.

But GDP growth remains resilient

Despite these challenges, China’s GDP growth remains robust. 2Q2025 GDP grew 5.2% YoY, surpassing consensus estimates of 5.1%, primarily driven by manufacturing. While June exports to the US fell 24%, overall exports increased due to stronger demand from other Asian and European markets. Exports to ASEAN countries have now surpassed those to Europe and the US, reflecting both production shifts and rising regional demand. Industrial production grew 6.8% YoY in June, offsetting slower retail sales and fixed asset investment. Sustained GDP growth above 5% is encouraging, especially given the drag from tariffs, and should continue to support equity indices and investor sentiment.

Despite trade tensions, China's GDP showed resilience, growing 5.2% YoY in 2Q 2025—better than the expected 5.0%—driven by strong industrial production, while retail sales eased. Source: Bloomberg

Government easing and stimulus

In addition to strong export performance, the government has implemented a series of economic stimulus measures, including repeated reductions in the reserve requirement ratio (RRR), lower lending rates, and relaxed home purchase conditions to boost consumption and the real estate market. The market anticipates further large-scale stimulus packages, with expectations of up to 1.9 trillion CNY (209 billion USD) in new support, particularly targeting home purchases and currency stabilization amid tariff challenges. These measures are essential to pull the economy out of deflation and restore momentum in China’s equity markets, which remain sensitive to policy signals. Any positive developments in US-China tariff negotiations would further bolster market sentiment.

AI as a growth catalyst

The launch of DeepSeek and other AI models has accelerated the adoption of AI across industries in China. The “dark factory” model—leveraging AI and robotics—is emerging as a new trend, helping offset the country’s diminishing labor cost advantage. US restrictions on China’s chip sector have spurred domestic innovation, with companies like Huawei expected to produce 3nm chips by 2026. Technology remains a strategic focus for the Chinese government, both to drive future growth and to transition the economy from manufacturing to consumption, strengthening domestic demand and reducing vulnerability to external shocks.

As AI adoption grows, investors active in China markets are closely watching its potential to offset macroeconomic headwinds. Despite major challenges in real estate and demographics, robust government stimulus and a strong push in technology could further improve the outlook for Chinese equities in the near term.

Market valuation

According to Bloomberg, the current trailing P/E ratio for the HK50 stands at 11.6x, close to the 10-year average of 11.5x, indicating potential room for further upside.

Relative valuation

Current valuation is still not expensive, with the forward PE holding at 11.29x, below the 10-year average of around 12x, while P/B fw hovers around 1.29x, slightly above the 10-year average. Source: Bloomberg

Stock in focus

• Tencent (0700.HK): Accelerating investment in AI applications across its product suite. Gaming revenue continues to grow strongly both domestically and internationally at over 20%. The robust WeChat ecosystem will further enhance Tencent’s efficiency in launching new products.
• BYD (1211.HK): Breakthroughs in battery technology and strong sales growth are positioning BYD as a global market leader.
• CATL (3750.HK): The global shift to electric vehicles is benefiting CATL, the world’s largest EV battery manufacturer. Despite falling battery prices, ongoing innovation in battery and charging technology keeps CATL highly competitive.
• Alibaba (BABA): A shift in government attitudes toward private enterprise could help Alibaba return to its former glory. The expansion of AI is also driving strong growth in its cloud segment, with overall business margins improving.

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Final thoughts

Despite facing persistent headwinds such as disinflation, a prolonged real estate downturn, and geopolitical trade tensions, China’s markets continue to show signs of resilience. Government stimulus, structural reforms, and a clear strategic focus on AI and advanced manufacturing are laying the groundwork for long-term transformation. 

While risks remain—especially in the property sector and external trade—recent data on GDP and industrial output suggest that the broader economy still has momentum. For investors, this presents a unique window to reassess exposure to China’s equity markets, which remain undervalued relative to global peers. 

With earnings multiples near historic averages and selective sectors—like AI, EVs, and cloud technology—poised for growth, the outlook for China’s equity markets in 2025 is cautiously optimistic. A well-informed, diversified approach can help navigate volatility while capturing potential upside in this evolving investment landscape.