Earnings Growth and Policy Backing Support Chinese Equity Rally

Chinese equities are widely expected to maintain their upward momentum into the coming year after recording a second consecutive annual rise, supported by easing geopolitical pressures, renewed investor interest in the technology sector, and a gradual shift of household savings into the equity market amid persistently low interest rates. Mainland China’s CSI 300 Index has gained 17 per cent this year, while Hong Kong’s Hang Seng Index has surged by nearly 30 per cent, outperforming expectations and catching many global banks and asset managers off guard after earlier adopting a cautious stance on the market.

Analysts at Goldman Sachs anticipate that the upward trend will persist, albeit at a more measured pace, as the market transitions from optimism-driven gains to returns increasingly supported by earnings growth and moderate valuation expansion. The rapid emergence of artificial intelligence start-up DeepSeek earlier in the year contributed to a reassessment of major Chinese technology firms such as Alibaba Group Holding and Tencent Holdings, while placing pressure on comparable US companies. Although Chinese stocks briefly declined following the announcement of new US tariffs in April, market sentiment recovered quickly after progress was made toward easing trade tensions between the two economies.

Additional momentum came from the reallocation of a portion of China’s vast household savings—estimated at 163 trillion yuan—into equities, as falling bank deposit rates and a prolonged downturn in the property market encouraged investors to seek higher returns elsewhere. Goldman Sachs, which had earlier forecast at least a 13 per cent rise in Chinese equities this year, reiterated its positive outlook, projecting a cumulative gain of 38 per cent by the end of 2027. This forecast is underpinned by expectations of valuation re-rating potential and robust profit growth over the next two years.

The bank also noted that China’s efforts to curb excess capacity in segments of the green economy could significantly enhance profitability in those industries by 2027. Improved market conditions have drawn international investors back, with global hedge funds increasing their exposure to Chinese stocks and mutual funds reducing their underweight positions. Longer-term institutional investors, including sovereign wealth and pension funds, have also shown renewed interest, particularly through cornerstone investments in Hong Kong initial public offerings.

Sector performance reflected the broader rally, with telecommunications, materials and information technology stocks leading gains on the CSI 300, while select industrial, mining and biotechnology firms posted exceptional returns in Hong Kong. The foundations for this rebound were laid in late 2024, when Beijing shifted decisively toward growth-oriented policies, rolling out stimulus measures aimed at stabilising equity markets and supporting the property sector. Market participants observed a notable change in policy tone, with greater emphasis on economic expansion and support for private enterprise.

According to Goldman Sachs, several major risks that had previously weighed on sentiment—including concerns over a global slowdown, excessive enthusiasm around artificial intelligence, geopolitical frictions and disinflation—have either diminished or been largely absorbed by markets. The bank concluded that continued macroeconomic and equity market policy support should help limit downside risks, reduce equity risk premiums and gradually lift the fair value of Chinese stocks.