The Chinese stock market has performed strongly in recent months, driven by a strong rally in technology stocks and broad-based sector rotation. This momentum reflects a significant shift towards renewed investor optimism. Historically, investor sentiment has followed cyclical patterns, each closely tied to the economic transformation underway in China. As economic drivers evolve, market investment dynamics also continue to change. Wenli Zheng, Portfolio Manager of the China Evolution Equity Strategy, T. Rowe Price explains this by underlining that investor sentiment has undergone strong fluctuations in recent years. From 2022 to 2024, economic difficulties and the downturn in the real estate sector have fueled widespread pessimism. However, since last September, a series of government policies have signaled that the deleveraging cycle may be coming to an end, helping to restore investor confidence.
An evolving equity landscape
The structural changes in the Chinese macroenvironment – explains the expert – have significantly influenced the performance of the stock markets. Prior to 2021, so-called “core assets,” such as blue chip and qualitative growth stocks, led the market, generating strong returns from 2016 to 2020. Since 2021, however, elevated valuations, moderating economic growth and rising uncertainty, exacerbated by the pandemic, have once again driven changes in market leadership.
Investing in traditional stocks is increasingly less preferable, as cyclical transitions and the evolution of the Chinese market structure lead to frequent sector rotations. Over the past decade, sectors such as telecommunications, finance and the Internet have taken turns leading major indexes, underscoring the need for investors to quickly adapt their strategies. It is also important to pay attention to political changes. In recent years, much of the extremely low prices seen in industries such as electric vehicles, solar energy and steel stem from intense domestic competition, often referred to as “involution.” In this context, companies are forced to reduce prices and accept lower margins just to survive.
To address these pressures and improve corporate returns, the government has initiated a new wave of supply-side reforms as part of its “anti-involution” campaign. These policies are aimed at improving profitability in mature sectors. As these industries enter a harvest phase, reducing capital expenditures and strengthening cash flows help stabilize profits, even without significant revenue growth.
Investors who focus solely on bottom line earnings may be overlooking attractive opportunities. For example, after years of growth in production capacity, the Chinese industry
of aluminum is now in the harvesting phase, with very positive financial results and share price trends, a trend that is also found in the LCD panel sector. These companies have proven to be resilient even without policy support, and “anti-revolution” efforts are expected to further support earnings growth in mature sectors.
Identify interesting opportunities
Considering the continuous changes in the Chinese market, investors need to be flexible. The key is to monitor long-term structural trends, identify emerging product and technology cycles, and exploit market distortions, thereby uncovering high-quality companies with strong long-term potential. Mid- and small-cap stocks deserve special attention, as they are often less studied and overlooked by investors. Data shows that many of China’s companies with long-term compound growth come from small-cap companies, but investors continue to focus primarily on a few large-cap stocks. Broadening your investment universe beyond large-cap stocks can help you uncover unique opportunities with high growth potential.
Three main themes emerge clearly
First of all, consumption is destined to become a key growth factor. Consumer IP stocks with strong brands can deliver rapid growth, although they require close monitoring of transaction trends. In contrast, platform companies with strong competitive advantages have generated more sustainable returns. For example, major shopping center operators benefit from overall consumer trends and can generate consistent returns by attracting foot traffic, regardless of subsector
consumer in vogue.
Second, technological innovation is also poised to drive China’s next phase of growth. Sectors such as advanced driver assistance systems (ADAS), artificial intelligence and biotechnology are entering a phase of rapid expansion. In particular, China’s ADAS sector is at an inflection point, with adoption rates expected to accelerate, similar to what has happened in recent years for electric vehicles.
Third, mature sectors that are entering the harvest phase, such as aluminum, LCD panels, fiberglass and wind energy, are seeing improved supply and demand dynamics, which could increase profitability and unlock investment value.
In conclusion, investing in the Chinese stock market requires flexible strategies and the ability to adapt to constant changes. Investors should pay attention to the changes
structural, avoid excessive concentration on large-cap stocks and actively seek out opportunities
