China Stocks Rally Despite Weak Data — What Lies Ahead?

China Equities Defy Weak Data — For Now

Despite a string of lacklustre economic data from China in recent months, the MSCI China ETF has risen around 29% year-to-date, significantly outperforming the S&P 500’s 18% gain. This strong performance stands in contrast to the deeply bearish sentiment that prevailed at the start of the year, when trade tariff risks were widely regarded as a well-known headwind.

China has so far emerged from trade negotiations in a relatively strong position, supported by its dominant control over the global supply of critical minerals. As a result, many analysts continue to see a constructive setup for Chinese equities in the coming year.

Technology Optimism and the “DeepSeek AI Moment”

A key driver of the renewed optimism has been the DeepSeek AI moment, which has reignited investor enthusiasm toward China’s technology sector. This narrative aligns with Beijing’s longer-term ambition to shift the economy toward a “new economy” model, where innovation and advanced technology take precedence while property-led growth recedes.

However, this transition is not without risks.

Property Downturn and the Weak Wealth Effect

We remain cautious about the lingering wealth effect from China’s property downturn, now in its fourth year. Property sales continue to plunge at double-digit rates year-on-year, eroding household balance sheets and confidence.

This has meaningful spillover effects on consumption, particularly as real estate remains a key store of household wealth in China.

Consumption Shows Clear Signs of Fatigue

Retail sales growth slowed to just 1.3% in November, marking the weakest pace since 2022. This reflects more than short-term caution — household spending power is likely to weaken further amid a sluggish job market.

Consumers appear increasingly reluctant to tap into the estimated US$11 trillion in excess savings accumulated in recent years. This hesitancy is contributing to persistent deflationary pressures within the economy.

Investment and Corporate Spending Under Pressure

On the investment front, conditions are equally challenging. Fixed asset investment fell 2.6% year-on-year for the January–November period, representing one of the steepest declines in decades.

Weak domestic demand, shrinking profit margins due to deflation, and policy uncertainty have dampened corporate willingness to invest. At the same time, Beijing’s crackdown on excess capacity in certain highly competitive industries has added another layer of pressure on growth.

Limited Policy Response and the “Payback Effect”

A natural expectation would be for policymakers to step in with large-scale fiscal and monetary stimulus. However, following a relatively strong first half of the year, the central government held back on aggressive measures in the second half.

The earlier strength was partly driven by front-loaded production, as exporters rushed to ship goods ahead of potential tariff escalations. As this effect faded into the second half of 2025, the economy began experiencing a clear “payback effect”, resulting in softer growth momentum.

Policy Support and the “National Team” Backstop

Despite these headwinds, there are notable positives. The Chinese government remains an active participant in equity markets. The so-called “national team” has continued purchasing ETFs, while authorities have encouraged insurers and long-term institutions to raise their equity allocations.

These actions provide a degree of downside support and signal Beijing’s desire to stabilise market sentiment.

Targeted Push to Revive Domestic Consumption

The central government is also intensifying targeted efforts to stimulate consumption. Purchase subsidies and trade-in programs across a range of goods have been expanded this year, while President Xi has openly acknowledged the risks of overreliance on export-led growth.

Policy measures are increasingly focused on structural consumption support, including free kindergarten education, childbirth subsidies, and family-related incentives.

Tourism, Demographics, and New Spending Trends

Efforts to reboot domestic tourism are intensifying, particularly in sports, entertainment, and cultural activities. These initiatives aim to encourage older citizens to deploy their savings more actively.

At the same time, demographic shifts — including a rising number of single households — are reshaping spending patterns. This has supported growth in areas such as pet ownership, lifestyle services, and experience-driven consumption.

Outlook: Modest but Higher-Quality Growth

Overall, we expect modest but decent growth for Chinese equities. The investment focus is likely to remain on technology self-reliance, selective fiscal support for domestic consumption, and a more restrained foreign policy approach to minimise tensions with the United States.

As China enters a new phase of economic reorientation, this shift—while uneven—may ultimately lead to a more durable and higher-quality growth model in the years ahead.