Five Overlooked Themes for Equity Investors in China

Chinese equities deserve closer attention from investors who may have avoided the market amid geopolitical tensions.

Ask an investor what they think about China and you’ll get wildly different responses. For some, China is about geopolitical risk, tariffs and slowing growth. For others, it’s a sleeping giant with untapped potential. As Chinese equities rally this year, we think it’s time to put that debate aside and take a clearheaded look at some compelling investment themes in the world’s second-biggest economy.

Chinese stocks seem to be defying gravity. Despite trade pressures and a tough economy, the MSCI China Index has surged by 31.7% in US-dollar terms this year through September 25. The MSCI Emerging Markets Index, with a 29% weight in China, rallied by 28.1% over the same period. 

Taking a Long View in a Short-Tempered Market

The Chinese market is often driven by short-term sentiment, and this year is no different. Easing US trade rhetoric since April has attracted domestic flows from retail investors, while economic weakness has taken a backseat.

So how should investors with long horizons approach China? Start by identifying trends that will shape the economy and business environment in the coming years—and can overcome short-term concerns.

1 | Innovators with Global Appeal

Despite restrictions in some “sensitive” industries, China is home to companies with global impact and influence.

In healthcare, Chinese pharmaceutical firms are increasingly licensing their intellectual property to global drugmakers. With competition intensifying, more multinationals are turning to Chinese researchers to complement their R&D pipelines. These partnerships often generate royalties with less geopolitical sensitivities than industries such as semiconductors, because the drugs’ ownership is global and the end goals are humanitarian.

China’s cultural export power is also growing. The latest example: Labubu—a character described as China’s Hello Kitty—is going viral worldwide. Created by Hong Kong illustrator Kasing Lung, Labubu has been embraced by celebrities from Rihanna to Blackpink. The Chinese company that manufactures Labubu is expected to see its overseas revenue exceed its domestic revenue for the first time in 2025, underscoring how innovative Chinese products can attract global consumers, while redefining a business and its return potential.

2 | Exporters That Don’t Rely on the US

China’s appeal to investors in the 21st century was rooted in its growing role as a global exporting powerhouse. Now, with US trade slowing, investors have become wary.

Yet despite the trade war, Chinese exports globally have continued to rise (Display). That’s because exports from China to other emerging market (EM) countries in Latin America and Asia are booming. This diversification of trade flows suggests that companies focused on non-US exports may be an overlooked pocket of opportunity.

3 | Anti-Involution: Rationalizing Competition

It’s not a familiar term, but in the Chinese context, “anti-involution” could be transformational. Involution describes excessive competition—whether in education, work or corporate behavior. China’s government has introduced policies to counter this trend, aiming to protect family life, reduce social strain and encourage more sustainable economic growth.

In 2015, the government launched supply-side reforms to rationalize the upstream steel and coal industries, where state-owned enterprises were hampered by outdated capacity. Now, the anti-involution program is targeting a diverse array of upstream and downstream industries ranging from solar energy and electric vehicles companies to copper miners and pork producers, as a glut of private companies created overcapacity.

While the policies may not resolve China’s macroeconomic woes, we think they will have positive microeconomic effects as supply cuts help boost prices in profits in targeted industries. These policies have already prompted a decline in manufacturing investment and loans (Display). We think investors who get ahead of the curve can position early in businesses that are poised to benefit from a healthier balance between capacity, profitability and long-term growth.

4 | Domestic-Market-Share Gainers

While China’s economy may look stagnant, it remains vast and dynamic. Fast-growing industries like fintech, sportswear and energy drinks, have domestic champions that are positioned to capture market share, even in a slower-growth environment.

5 | Corporate Governance Reform

Like in Japan and Korea, China is pushing companies to improve governance and shareholder returns, via the nine-point guidelines unveiled in April 2024.

Now, profitability, dividends and buybacks are at record highs (Display). And buybacks have become accretive in China, meaning they are boosting earnings per share. While investors are still skeptical, we believe companies that exceed expectations on governance can create upside.