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Eight reasons to (re) consider China Equities

Despite macroeconomic headwinds, a property downturn, and geopolitical tensions, Chinese equities have presented investors with unique opportunities.

We present eight compelling reasons to re-evaluate China equities, highlighting their value, long-term return potential, and important role in a diversified global equity portfolio.

1 Underappreciated Technology – China’s “AI Leap Forward”

In January 2025, DeepSeek made waves by announcing an AI model rivalling ChatGPT's capabilities at a fraction of the cost. This highlights China's significant advancements in technology and AI, encompassing humanoid robots, autonomous driving, and renewable energy. The key takeaway is that China's tech capabilities are more advanced than previously recognised, opening up diverse investment opportunities as this progress becomes clearer.

2 “Don’t fight the PBoC”

The phrase “Don’t fight the Fed” in the US can be adapted to “Don’t fight the PBoC” in China. China equities closed 2024 with double-digit gains in US dollar terms, ending a three-year losing streak¹, thanks partly to the People’s Bank of China (PBoC). The central bank cut interest rates and introduced pro-equity measures, including buying domestic ETFs and extending credit for stock repurchases, offering strong downside protection for China A market.

3 Domestic flow of funds

Foreign investors account for only about 4% of the China A market, making domestic investors key price setters.

The outlook for domestic fund flows is strong, with retail cash levels near record highs and household deposits twice the market capitalisation² of China A-shares. With low government bond yields, domestic equities are increasingly attractive, especially with dividend yields over 3%.

Institutional investors, like insurance companies and pension funds, will also raise their equity allocations, as their current levels are significantly lower than those in developed markets.

4 Increasing share buybacks, higher dividends

Chinese corporates also hold significant cash reserves. Non-financial companies collectively have around USD 2.3 trillion, equivalent to about 27% of their market cap—higher than most global markets³. Regulators have enhanced shareholder returns to boost equity market appeal, leading to record share buybacks in China A-shares in 2024. Additionally, more companies are introducing interim dividends alongside their traditional annual payments, making regular cash distributions more attractive to retail investors.

5 Reduced level of equity issuance

In the past year, measures have been taken to tackle high equity issuance in the China A market.

The combined market capitalisation of mainland China and Hong Kong has grown from under USD 1 trillion in 2003 to about USD 16 trillion⁴, with listed China A companies more than tripled to around 5000⁵.

New regulations imposed stricter IPO oversight and improved delisting processes. Consequently, share buybacks exceeded equity issuance in 2024 for the first time, indicating a structural shift towards a better balance of equity demand and supply.

6 Attractive valuations

We find valuations for both onshore and offshore equities attractive, with price-to-book valuations below long-term averages. Although price-to-earnings ratios appear high, this is due to cyclically depressed corporate earnings. Additionally, the widening yield gap enhances the appeal of China equities: the CSI 300 Index offers a dividend yield of about 3.5%, compared to a 10-year government bond yield of around 1.6%⁶.

7 “You have to be in it to win it”

China's equity performance over the past year highlights a key lesson for global asset allocators. In 2024, the market achieved double-digit returns in just a few weeks, driven by coordinated policy initiatives. This underscores that it may be challenging to seize future rallies without prior exposure to China equities. As the saying goes, "You have to be in it to win it."

8 Property risks diminishing

Risks related to the property market have weighed on China equities in recent years, but we believe the downturn is closer to its end. The government has taken significant steps to stabilise the property market, including reducing mortgage rates and improving developer funding access.

While it may take time for homebuyer confidence to recover, and property prices might still decline, previous tail risks have eased. This is evident in China’s bond market, where the iBoxx USD Asia ex-Japan China Real Estate High Yield Index has rebounded over 70% since its low in November 2023.

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Source:

Based on MSCI China A Onshore Total Return Index and MSCI China Total Return Index in USD as of end 2024
HSBC, Wind, AllianzGI as of 31 December 2024
Goldman Sachs as of 25 April 2024
World Federation of Exchanges (WFE), Hong Kong Stock Exchange, Wind, Top Foreign Stocks, Allianz Global Investors, as of 30 November 2024
Wind as of 31 December 2024
Wind as of 31 December 2024

Sustainable Investing and Stewardship Report 2024