Fidelity's China Investment Director, Jessie Meng, and Client Portfolio Strategist, Christopher Wong, recently analyzed the Chinese market dynamics and investment thinking. They pointed out that the rebound in the Chinese stock market has been primarily driven by government policy shifts, ongoing developments in artificial intelligence (AI), and abundant liquidity. In China, sectors such as new consumption, electric vehicles, technological innovation, and automation still hold substantial opportunities. Overall, China is transitioning from a focus on rapid GDP growth to prioritizing high-quality development, while also implementing policies that encourage corporate dividends and increase shareholder returns, thus supporting a “slow bull” market and fostering a long-term stable market outlook.

Factors Driving the Rebound in the Chinese Market The rebound in the Chinese stock market has greatly benefited from the government's policy shift, continuous advancements in AI (notably with the emergence of “DeepSeek”), and ample liquidity. While investors analyze Chinese economic data to assess fundamental factors, the stock market has rebounded from its lows in September, with some small and mid-cap stocks and innovative technology companies performing exceptionally well, leading the Hang Seng Index to rise approximately 30% year-to-date. The Chinese government has adjusted its policy direction to focus on supporting high-quality development, showcasing its determination to steer the economy out of deflation. Supply-side reforms, including “anti-involution” actions, aim to cut excess capacity and curb chaotic price competition.

Measures to boost demand include issuing household subsidies to stimulate the consumer goods sector and other services. The advent of DeepSeek, which launched a low-cost AI model, alleviated investors' concerns about China's ability to compete with global firms in the AI and other tech-related fields following its decoupling from the U.S. Additionally, Alibaba’s new AI technology and advancements in biotechnology and automation have also contributed to the stock market's rebound. Furthermore, the market's recovery is fueled by ample liquidity, with institutional investors becoming increasingly active and serving as a significant source of inflow into the domestic A-share market. Since the second half of 2024, insurance funds have also increased their stakes in A-shares and the overall stock market to enhance investment returns.

Significant Disparity Between Offshore Market Recovery and Domestic Market Lag The overall upward momentum in the Chinese market has been led by H-shares (stocks of Chinese companies listed in Hong Kong), with one key driving factor being the southbound capital from the Shanghai-Hong Kong Stock Connect scheme. This plan allows qualified mainland investors to purchase eligible H-shares. Although most H-shares are still held by non-Chinese investors, slight increases in demand have successfully propelled this offshore market rebound. However, since the second and third quarters of this year, the domestic A-share market has significantly caught up, primarily benefiting from consumer stimulus policies and the "anti-involution" actions that have a substantial impact on domestic companies. In addition to these positive developments, fundamental factors are also improving. The first-quarter performance of the MSCI China index constituents has notably met market expectations for the first time in over four years. Although A-share companies continue to lag in performance, the gap between the earnings results and expectations has narrowed.

At the same time, retail investors have not yet entered the stock market en masse. In a low-interest environment, the attractiveness of rollover deposits is diminishing, prompting households to seek higher-return assets. As the wealth effect generated by stocks strengthens, families may shift their "excess savings" toward the domestic stock market, potentially providing additional momentum to the markets. Given this context, Fidelity believes that the A-share market will continue to chase the offshore market.

Diversified Opportunities Across Themes and Industries In terms of investment themes, Fidelity’s fund managers are focusing on AI, robotics, and manufacturing automation, believing these sectors harbor growth opportunities. Dividend-paying stocks have also performed well, with H-shares outperforming A-shares due to their more attractive dividend yields, approximately 7% for H-shares compared to 4.5% for A-shares. A significant amount of insurance capital has flowed into the stock market, particularly in bank stocks listed in offshore markets that trade below their onshore counterparts. In the new consumption sector, the younger generation seeking unique experiences is flocking to cultural entertainment stores like Pop Mart, which sell trendy toys. New consumption is no longer confined to traditional products like liquor or spirits. Despite some stock valuations appearing high, related fields continue to offer investment opportunities. Other noteworthy sectors include electric vehicles, innovative technology, and industrial fields.