Chinese equities have more room to grow

Chinese equities have staged a much-needed recovery this year. After several years of weak sentiment – and even the “uninvestable” label from some global investors – valuations in China were left at attractive levels versus global peers. As domestic liquidity rotated out of low-yielding fixed income and back into equities, investors – and therefore the market – responded.

We spoke with Bin Shi, Head of China Equities, about what has been driving the rally and whether it still has room to run. We also asked where he is deploying capital, and why IPOs in Hong Kong have been such a bright spot.

Chinese equities have staged a notable recovery after several years of weak sentiment, which had even led some global investors to label the market “uninvestable.”

As domestic liquidity has rotated out of low-yielding onshore fixed income and back into equities, investors have been drawn to attractive starting valuations and solid corporate fundamentals. Many high-quality Chinese companies were trading at discounts following two to three years of caution, while also offering appealing dividend yields. With government bonds yielding below 2% and economic conditions showing signs of stabilization, capital has naturally flowed back into the equity market.

Despite the rebound, the Chinese equity market remains well below its 2021 peak, which suggests that there is still room for further upside. Compared with fixed income and other regional stock markets, Chinese equities continue to offer a compelling case, supported by more reasonable – and in many cases, still attractive – valuations. This combination of a low starting point, improving sentiment and continued earnings delivery underpins the argument that the rally may be sustainable rather than a short-lived bounce.

Looking ahead over the next three to five years, the focus is on companies with clear, defendable advantages both domestically and internationally. Given that the Chinese economy is not yet firing on all cylinders, selectivity is crucial. Areas of interest include healthcare and pharmaceutical businesses that are already demonstrating their ability to compete globally, as well as Chinese companies expanding overseas. Many of these firms have strong positions in their home market but relatively low penetration abroad, leaving a long runway for growth as they internationalize.

Initial public offerings in Hong Kong have also been a bright spot. The team has been active in this area, based on the view that several leading Asian companies are not yet fully recognized in their home markets. Listing in Hong Kong can help narrow valuation gaps versus global peers by broadening the investor base. Recent examples include a leading global battery supplier whose valuation multiple rose closer to international counterparts after listing, and a well-established pharmaceutical company that used its Hong Kong listing to rebuild partnerships with global firms, particularly US multinationals. Overall, this IPO activity has been a successful source of opportunities this year.

On the technology side, the structural outlook for China’s IT sector remains positive, even though some of the most prominent names continue to trade at demanding valuations. Rather than concentrating solely on these headline stocks, the strategy targets “second-order” beneficiaries of technological change – companies in tech or tech-enabled industries where the impact of artificial intelligence and automation is improving efficiency and profitability. Even if such companies are not traditionally classified as tech, the earnings uplift from adopting new technologies can, over time, support a valuation re-rating as the market recognizes these improvements.