Chinese markets enjoyed a strong 2025, being amongst some of the best-performing major equity markets in the world. Meanwhile, the CNH strengthened to some of its strongest levels against the dollar in over three years. The 2026 National People’s Congress (NPC) didn’t substantially change the government’s tone on consumption stimulus, though technology was heavily emphasized, with important implications for the nature of China’s growth path and investment opportunities.
In this week’s note, we dive into our view on China’s economy and currency, assess potential risks from the Middle East conflict, and highlight opportunities within Chinese equity markets.
China rang in the Year of the Horse with some positive signs in domestic demand, as data showed Lunar New Year holiday spending rose a markedly stronger 5.7%. That said, takeaways from the NPC this year still signals no clear step up in measures aimed at boosting household consumption. The Government Work Report (GWR) largely reiterates existing initiatives, indicating that any consumption recovery will likely continue to rely more on organic healing of household balance sheets.
The anemic consumption outlook combined with a persistently slack jobs market have throttled income growth and kept households anxious. Early indicators suggest modest improvement since late 2025, but China's patchy employment data means the jury remains out. A 4.5–5% growth target (vs “around 5%” previously) is also widely read as a lower hurdle and indicates a quality-first framing – which means less pressure for further stimulus. It prompts us to maintain the outlook for a gradual and unbalanced economic recovery in 2026.
Exports are still expected to do much of the heavy lifting for growth. Less discussed, however, is the potential for a rebound in capex. The downturn in fixed asset investment since 2H 2025 has largely been a side effect of the “anti-involution” campaign, and could begin to reverse this year.
Messages from the NPC and the full 15th Five-Year Plan report place heavy emphasis on technology as a core policy pillar. The GWR repeatedly highlights “new productive forces” and strategic sectors, with explicit references to AI, semiconductors, aerospace, humanoid robots, and related areas. We expect front-loaded, public sector-led investment into new high end manufacturing initiatives, which could help turn around recent weakness in capex.
The escalating U.S.–Iran conflict has led to a blockage of the Strait of Hormuz and a sharp spike in oil prices. China is the single largest destination for oil and liquified natural gas (LNG) transiting the strait, receiving about 38% of the crude shipped through this route.
That said, we see only a moderate downside risk to China’s macro outlook. The economy has become more resilient to energy supply disruptions by reducing import dependence through the build-out of renewables and by diversifying energy sources in recent years.
China’s energy trade balance is around 2% of GDP vs more than 5% for Korea and Taiwan and 3.7% for Japan. The share of energy imports sourced from the Middle East has also fallen to roughly 37%, compared with more than 50% for Japan and Korea. Inflation pressures are further contained by domestic price controls and the broader deflationary environment.
As USDCNH tested the lower end of our prior 6.90–7.10 range, we reassessed our CNH view and now see more medium term drivers supporting moderate appreciation from current levels, even as the earlier seasonality-driven strength has paused. We therefore revise our year end outlook to 6.70 (6.60–6.80).
Macro challenges remain, but growth sentiment is improving at the margin. Strong exports could continue to support China’s balance of payments and reinforce CNH fundamentals. Against this backdrop, exporters increasingly believe that potential CNH gains could outweigh the carry benefits of holding USD, leading to a higher FX conversion ratio from low levels since 2022.
The People’s Bank of China (PBOC) also appears comfortable with gradual appreciation. With trade surpluses still increasing by roughly USD100bn per month, exporter conversion will likely continue to support additional CNH strength until the central bank steps in more forcefully. That said, a sustained move significantly below 6.70 remains unlikely, given the adverse implications for deflation and export competitiveness. U.S. President Trump’s upcoming visit to China is closely watched, as foreign exchange could potentially become part of the trade negotiations.
We are upgrading our outlook on Chinese equities. We now expect earnings growth of around 13% in 2026 and 14% in 2027, prompting us to raise our MSCI China outlook to 94–98. There are a few factors underpinning this more constructive view:
Our upgrade is fundamentally earnings-driven, not valuation-led. We refrain from raising valuation multiples, maintaining our assumptions at around 12.5x for the offshore and 14.6x for onshore markets respectively. Structural challenges remain significant: consumer confidence is still constrained by labor market slack, the property downturn continues to weigh on sentiment, and policymakers remain cautious about aggressive demand side easing. In our view, these factors limit the scope for a sustained multiple expansion at this stage of the cycle.
That said, relative valuations and positioning have become increasingly compelling. MSCI China has underperformed MSCI Asia ex-Japan by around 20% over the past year, a gap that has rarely been exceeded over the past two decades. This underperformance occurred despite stabilizing earnings momentum and macro conditions. Positioning data reinforce this asymmetry: global active funds remain modestly underweight China, while global ex-U.S. funds are deeply underweight at roughly 6%, leaving ample room for re-allocation should confidence improve. In this context, even modest positive surprises on earnings or policy execution could drive disproportionate upside.
The rapid adoption of AI agents has emerged as a powerful near-term catalyst for China’s large-cap technology sector. The enthusiasm around OpenClaw and locally-adapted AI agents has triggered sharp equity moves in companies such as Tencent (Workbuddy), Zhipu (AutoClaw) and MiniMax (MaxClaw), echoing the earlier sector re-rating sparked by Alibaba’s Qwen model. These developments align with the policy emphasis on AI as a strategic industry and support our conviction in technology as a primary engine for earnings growth.
Regulatory scrutiny around data security has increased, particularly within government agencies and state-owned enterprises. However, we view these measures as containment rather than suppression, aimed at managing systemic risks rather than curbing commercial adoption of AI outright. As such, AI agents remain a meaningful catalyst for earnings upgrades in the near-term.
We prefer offshore over onshore equities. Valuations are more attractive, with MSCI China down roughly 13% from its one-year high, compared with a decline of only 2% for the CSI 300. Offshore equities also stand to benefit more directly from CNH appreciation, which improves earnings translation and foreign investor sentiment. In contrast, onshore equities remain more exposed to domestic demand weakness and policy constraints.
The two markets’ respective sector compositions further strengthens the case for offshore. Technology and internet accounts for roughly 40% of MSCI China, offering more direct exposure to themes with policy support such as AI, cloud infrastructure and high-end manufacturing. These sectors align closely with the government’s strategic priorities and are better positioned to capture incremental earnings growth in a quality-first recovery. As such, we reiterate our positive view on a basket of offshore-listed China tech innovator equities.
To conclude, even if the broader economy may just be trotting along at a stable pace, specific opportunities in the equity market may yet gallop alongside technology tailwinds.
For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material. Indices are not investment products and may not be considered for investment.
All market and economic data as of March 2026 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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