By Reshma Kapadia

Chinese stocks just hit their highest level in a decade, amid investor excitement for Chinese artificial intelligence and semiconductor companies, a U.S.-China trade truce and optimism about the government's efforts to rein in excess competition and capacity.

The Shanghai Composite Index closed at 3825.76, the highest since August 2015 and up 14% so far this year. Chinese stocks broadly have been on a tear. iShares MSCI China exchange-traded fund have risen almost 29% year to date, more than double the S&P 500's 9%. The surge comes even as China's economy remains mired in a multiyear rout. But the fragile trade truce between the U.S. and China, with the latest tariff deadline extended into late fall, has eliminated a near-term spoiler for the market. Chinese stocks have been climbing since early this year, when DeepSeek's simpler, cheaper AI models reinvigorated interest in China's technology companies. Barron's outlined the potential for emerging market stocks broadly last October and recommended Alibaba's stock on Oct. 31. Shares of the internet giant are up 20% since then. In February, Barron's outlined why Chinese stocks could keep rising, building on the momentum of DeepSeek's news.

Analysts see the prospects for further gains. The optimism stems from Beijing's "anti-involution" campaign to tackle intense competition that has fueled deflationary price wars and excess capacity, according to a client note from 22V Research analysts Michael Hirson and Houze Song. Though the analysts remain skeptical about China's economy, they write that the anti-involution drive is boosting analyst and investor enthusiasm for equities, at least in the short-term. The duo noted improved sentiment among market analysts since late June, when Chinese leader Xi Jinping backed effort to remove excess capacity in electric vehicles, lithium-ion batteries, solar photovoltaics, steel, and cement. Momentum in Chinese stocks tend to beget more momentum. TS Lombard's Head of China research Rory Green sees further gains even though the excitement around technology stocks, Beijing's policy measures to stabilize the economy and the U.S.-China truce are reflected in the market today. "Politics and momentum are the critical drivers of Chinese bull markets. We think both factors are currently favorable, with up to $7 trillion of household savings on the sidelines. Yields, too, are likely to climb higher," Green says. Green sees investor inflows likely to fuel the next leg of the rally. With the Chinese property market yet to bottom, households have few options on where to park their money -- and the gains could draw investors worried about missing out. The MSCI China is still 25% off its spring 2021 peak before Beijing's crackdown on internet companies that rattled investors along with a multiyear rout in the property sector. Even after adjusting for increased political uncertainty and slower growth, Green sees room for further gains.

That said, analysts caution the rally could hit some roadblocks later this year and may not be sustainable given a still lackluster economic outlook and the fragility of the recent U.S.-China thaw.

But conditions are in place for the run to keep going for a couple months at least.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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August 22, 2025 11:49 ET (15:49 GMT)

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