Upgrade to 3.5 Stars: Chinese equities set to extend their rally into 2026

• Chinese equities emerged as a true “dark horse” in 2025, validating our constructive stance in last year’s outlook, with the market gaining over 20% YTD.

• Private sector support is strengthening, backed by legal frameworks that reduce the risk of abrupt policy changes. Private enterprises are receiving greater attention, funding, and government support, reinforcing growth confidence.

• Technology remains a key driver, with China’s AI capabilities expanding rapidly. Rising AI demand and supportive policies provide a foundation for higher earnings and innovation breakthroughs.

• Economic challenges persist, but additional stimulus is expected in 2026 to stabilise the housing market and prioritise consumption growth, reducing downside risks.

• Chinese equities remain attractively valued. The MSCI China Index and Hang Seng Tech Index projected to deliver around 20% and 38% upside, respectively, by FY2027. Therefore, we raise the market’s rating from the 3.0 to 3.5 stars, reflecting an “Attractive” investment outlook.

Chinese equities have emerged as a clear “dark horse” in 2025, validating our constructive stance in last year’s outlook. The government’s more supportive policy posture towards the private sector, together with renewed enthusiasm following the launch of DeepSeek’s cost-efficient AI model, has reignited investor interest across the China market, particularly within the technology sector.

As the year draws to a close, Chinese equities have risen 22.2% year-to-date in SGD terms, outperforming most major markets under our coverage (Figure 1). Stripping out currency impacts, the market’s gains would have been closer to 30% in HKD terms.

With 2025 ending on a strong note, investors are wondering whether China can sustain this momentum into the coming year. In our view, the case for Chinese equities to outperform remains intact in 2026.

Figure 1: Chinese equities have gained 22.2% year-to-date in SGD terms, despite significant currency weakness.

Pro-private sector policies pave the way for China’s growth

China’s increasing support for the private sector remains a key catalyst for both its economy and equity market. The introduction of the Private Economy Promotion Law, together with continued emphasis in the 15th Five-Year Plan, signals a longer-term policy pivot towards a segment of the economy that was previously weighed down by regulatory crackdown. With formal legal backing in place, investors now have greater confidence that private enterprises are less likely to face abrupt policy disruptions, an important step in gradually restoring trust in both the economy and the equity market.

While state-led enterprises continue to play a central role in China’s economic model, the government has been deepening the state-private partnership by granting private capital access to infrastructure projects previously dominated by the state, including rail, energy and water, with stakes of over 10% now permitted in key initiatives. To further support private financing, the National Development and Reform Commission (NDRC) has established a national investment and financing platform to facilitate credit allocation to private enterprises in need. These measures mark concrete steps in promoting the development of private investment and businesses, reinforcing a more supportive environment for economic long-term growth.

China’s tech engine gains speed with powerful policy backing

Another bright spot likely to continue supporting China’s economy and equity market is the technology sector. China has made notable strides in AI capabilities, with the emergence of DeepSeek signalling that the US-China technology gap may be narrower than commonly perceived. Since then, an increasing number of Chinese tech companies have launched AI large language models (LLMs). Moonshot AI’s Kimi K2 and DeepSeek V3.2 offer cost-efficient, high-speed performance with strong reasoning capabilities, ranking among the top 10 LLMs globally (Table 1).

Table 1: Chinese LLMs have shown decent reasoning scores, at cheaper costs and relatively fast speed

Rank	Model	Intelligence Score	Blended USD/1M Tokens	Perceived Speed Score*
1	Gemini 3 Pro Preview (high)	73	$4.50	3.5
2	GPT-5.2 (xhigh)	73	$4.81	157.6
3	Claude Opus 4.5	70	$10.00	31.0
4	GPT-5.1 (high)	70	$3.44	3.6
5	GPT-5 (high)	68	$3.44	1.0
6	Kimi K2 Thinking	67	$1.07	126.2
7	GPT-5.1 Codex (high)	67	$3.44	13.7
8	GPT-5 (medium)	66	$3.44	2.3
9	DeepSeek V3.2	66	$0.32	23.8
10	o3	65	$3.50	24.5
*The perceived speed score is calculated by Median Tokens/s divide by First Answer Chunk (s). Source: Artificial Analysis. iFAST compilations.  Data was taken from the source on 16 December 2025.

China’s technology leaders are starting to see tangible returns from their AI investments. Recent quarterly results highlight the impact across sectors, where AI is enhancing advertising precision, user engagement, and operational efficiency in areas such as coding, gaming, and video production. Tencent reported a 19% jump in profits, boosted by AI-related gains and a 20% improvement in R&D efficiency from AI-powered automation. Cloud giant Alibaba posted a 34% year-on-year surge in cloud revenue, accelerating from 26% in the June quarter. CEO Eddie Wu noted that cloud server demand continues to outstrip capacity, reinforcing the need for sustained AI investment over the next three to five years (Table 2).

Table 2:  China’s tech giants ride AI wave to stronger earnings

Tech company	AI-related earnings in 3Q25	Outlook for AI and related businesses
Tencent	20% improvement in R&D efficiency driven by AI-powered automation.	…Upgrading the team and architecture of our HunYuan foundation model… As HunYuan's capabilities continue to improve, our investment in growing Yuanbao adoption, and our effort in developing agentic AI capabilities within Weixin, will gain further traction.
Alibaba	34% growth in cloud-business revenue.	We will be investing in AI infrastructure aggressively, the 380-billion-yuan investment we previously mentioned might be on the small side given the customer demand.
Kuaishou	14% increase in marketing revenue, primarily due to the use of AI to upgrade marketing production solutions.	In the long run [we] believe a comprehensive AI application ecosystem will help the company better adjust to the market with high growth potential.
Baidu	50% increase in AI-related revenue across cloud, application and marketing businesses .	AI-related businesses had laid a solid foundation for sustainable long-term growth.

The re-entry of Nvidia’s H200 chips into the Chinese market is likely a positive catalyst for internet and cloud companies that rely on high compute power to expand their businesses. While domestic AI silicon, such as Cambricon and Huawei Ascend, is progressing, it has yet to match the performance and efficiency of Nvidia’s high-end GPUs. Both Tencent and Alibaba noted in their latest earnings calls that cloud earnings could grow even faster if constrained by AI chip supply were alleviated. The H200 chips act as an interim bridge, supporting cloud vendors such as Alibaba, Tencent, Baidu, and Huawei, as well as other high-compute applications, to deliver tangible growth in 2026.

The supply of H200 chips is also unlikely to derail domestic chip development. Local chips will continue to dominate inference workloads, cost-sensitive applications, and government-related projects, while the H200 primarily serves AI training tasks that domestic chips cannot yet handle. By focusing on different layers of the AI compute stack, Nvidia’s chips fill a capability gap while giving domestic suppliers time to advance their technology without being forced into premature competition at the cutting edge. Importantly, China’s semiconductor self-sufficiency remains a strategic priority under the 15th Five-Year Plan and the “new productive forces” framework, ensuring continued policy support, subsidies, and sustained domestic demand. Local suppliers are therefore structurally protected, even with temporary access to foreign chips.

This dynamic supports a positive outlook for China’s technology sector in 2026. The information technology sector is expected to lead earnings growth, delivering high double-digit expansion (Figure 2). Beneficiaries are likely to span the entire semiconductor value chain. Chip designer Cambricon, foundry Hua Hong Semiconductor, and infrastructure providers Hygon Information Technology and Zhongji Innolight, are all well positioned to deliver strong earnings growth.

Consumer discretionary, another segment of the Chinese equity market, is expected to achieve moderate growth, supported by AI-related business expansion, consumption policies, and the government’s efforts to curb “involution.” However, intense competition among e-commerce giants in instant commerce and aggressive EV price discounts will weigh on near-term earnings. Similarly, the communication services sector is likely to see selective opportunities, with overall high-single-digit growth. Individual companies such as Tencent, Kuaishou, and Bilibili are positioned to benefit from AI integration, enhanced monetisation, and operational efficiencies, reinforcing their role as growth drivers within the sector.

Figure 2: Tech sector remains key engine for earnings growth in 2026

Economic challenges persist, but recovery is underway

Despite the notable strength in the technology sector, market concerns over China’s economic fundamentals persist. The property market weakened in October (Figure 3) after earlier signs of stabilisation. Contributing factors include unfavourable base effects, subdued buyer sentiment, and limited incremental policy support in the second half of 2025. Measures such as allowing a larger share of commercial units to be listed as REITs have been relatively modest, providing only mild relief to the sector.

Figure 3: China’s property market weakened sharply in October

 

After a year of measured policy, more targeted support is expected in 2026. Authorities are likely to focus on reducing inventory by purchasing unsold homes for affordable housing, controlling new supply, and encouraging demand through home upgrades and mortgage interest subsidies. The property sector’s recovery is expected to be gradual, as policymakers prioritise stabilisation over aggressive stimulus, while channelling resources towards other growth engines such as advanced manufacturing and technology innovation.

Similarly, we expect stronger policy support for consumption in 2026. The consumer trade-in programme is likely to be maintained, with funding expected to remain at least at current levels. In the first half of 2025, retail sales growth rose to around 5.6% year-on-year, supported largely by big-ticket purchases under the programme (Figure 4). However, as subsidies moderated in the second half, growth slowed to about 2.9%, reflecting a more measured pace of recovery and underscoring the need for policymakers to provide larger-scale support. The recently concluded Central Economic Work Conference placed consumption at the top of next year’s policy agenda, pledging “special actions” to boost demand. Authorities signalled plans to increase household incomes, which, if implemented effectively, could underpin a more sustainable rebound in consumption.

Figure 4: Retail sales rebounded strongly in 1H25 but weakened in 2H25

A firmer consumption backdrop would also help alleviate China’s deflationary pressures, which have already shown signs of improvement. Headline CPI rose to 0.7% year-on-year in November, while core CPI – a better gauge of discretionary demand as it excludes volatile food and energy prices – has remained relatively resilient at 1.2% (Figure 5). Heading into 2026, stronger demand supported by stimulus, alongside supply-side adjustments and continued efforts to curb excessive competition or “involution”, should contribute to a more balanced supply-demand dynamic and a gradual normalisation in price trends.

Figure 5: China’s inflation is gradually trending upward

While a full resolution of China’s structural challenges will take time, incremental improvements in demand conditions are likely to support a more favourable macro backdrop in 2026.

Chinese stocks poised for attractive gains

The Chinese government’s enhanced policy support, targeting key economic challenges such as the property market and consumption, has reduced downside risks for the economy. Coupled with a strategic focus on private sector growth and the development of technology and advanced manufacturing, China is entering a new phase of growth.

Chinese equities have recently undergone a pullback, partly due to global risk-off sentiment and AI bubble concerns. However, the decline has been more measured than that seen in some US counterparts, due to more reasonable valuation and the continued strength of China’s AI growth narrative. China’s AI ecosystem remains in a rapid expansion phase, requiring sustained investment in AI infrastructure and capacity build-out, which has helped cushion downside risks.

Following the pullback, the MSCI China Index trading at 13.7X forward P/E (Figure 6). While this is slightly above the 10-year average, valuations remain well below the 2021 peak, providing entry points for long-term investors as the economy transitions into its growth cycle.

Based on a fair P/E of 12X, the MSCI China Index is projected to deliver nearly 20% upside, targeting HKD 98 by FY2027. The Hang Seng Tech Index is expected to see even stronger gains, with a target of HKD 7,520, representing a 37.8% upside. Given the strong growth prospects, we raise China’s rating from 3.0 stars to 3.5 stars, reflecting an ‘Attractive’ investment outlook.

Investors should not be deterred by recent volatility, which is largely broad-based and sentiment driven. Rather, we recommend seizing the opportunity to invest in Chinese equities and its technology sector now.

Table 3: Recommended products

Market / sector	Recommended products
China	·         Fidelity China Focus A-SGD ·         iShares Core MSCI China ETF (HKEX: 2801)
China Tech	·         iShares Hang Seng Tech ETF (HKEX: 3067) ·         Lion-OCBC Securities Hang Seng Tech ETF (SGX: HST)

Table 4: Projections for the MSCI China Index

	2024	2025E	2026E	2027E
PE Ratio	13.6	12.7	11.3	10.1
Earnings Growth	24.2%	7.2%	12.7%	12.0%
EPS	6.01	6.44	7.26	8.13
Projected Fair Price (Based on fair PE ratio of 12X)				98
Upside				19.7%
Source: Bloomberg Finance L.P., iFAST Compilations. Data as of 17 Dec 2025.

Figure 6: Chinese equites are trading at reasonable P/E levels

Figure 7: Share price vs. EPS chart for the MSCI China Index

Table 5: Projections for the Hang Seng Tech Index

	2024	2025E	2026E	2027E
PE Ratio	22.8	21.5	19.1	16.3
Earnings Growth	43.1%	6.1%	12.6%	16.8%
EPS	239.6	254.3	286.3	334.4
Projected Fair Price (Based on fair PE ratio of 22.5X)				7,520
Upside				37.8%
Source: Bloomberg Finance L.P., iFAST estimates Data as of 17 Dec 2025.

Figure 8: Share price vs. EPS chart for the Hang Seng Tech Index

Declaration:

For specific disclosure, at the time of publication of this report, the analyst who produced this report and IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities.