Diversification remains critical, and portfolios with both onshore and offshore equities are ideal.
In Brief
- Three themes have emerged within China’s equity markets in recent months: AI developments, anti-involution, and the globalization of brands and intellectual properties.
- The crossroads of these tailwinds should continue to support Chinese equities over the medium- to long-term horizons, though the degree of success will vary across themes and industries.
- In the absence of large-scale policy stimulus, macro fundamentals may only improve at a gradual pace, and the opportunity set offered by offshore equities could continue to expand relative to onshore equities.
Three themes have emerged within China’s equity markets in recent months: AI developments, anti-involution, and the globalization of brands and intellectual properties. The more favorable external environment, characterized by peaking tariff risks and improving perceptions of China among domestic and international investors has also supported the recent market rally. Increasing expectations for the Federal Reserve to resume monetary easing also favor risk assets, especially emerging market equities. Meanwhile, onshore yields remain at low levels, with the 10-year central government bond yielding only 1.87%, which has also enhanced the attractiveness of equities from both return on equity and dividend yield perspectives, driving fund flows.
From government policies to company-led initiatives, these factors have elevated market expectations for healthier margins in the near term, expanded total market share, and accelerated technological advancement over the longer term. Collectively, these dynamics have propelled Chinese equity markets to near three-year highs, with the MSCI China and CSI 300 indices returning 34% and 18% year-to-date, respectively.
From a fundamental perspective, with the 2Q earnings season drawing to a close for Chinese equities, although our earnings tracker1 indicates a year-over-year (y/y) growth of –5.8% in reported operating income2, Chinese equities appear to be at an inflection point. Corporates have welcomed recent policy changes and remain optimistic about technology upgrades. Earnings revisions are also bottoming out, with consensus expecting earnings per share growth to accelerate to 14.4% y/y in 2026, up from -3.0% y/y in 2025 (Exhibit 1).
In this note, we revisit key earnings calls over the quarter and assess how the three trends are benefiting different industries and their expectations on the outlook.
A broadening of AI adoption and beneficiaries
The structural long-term case for artificial intelligence (AI) development remains robust and continues to be a common theme in earnings calls. Evolution of large language models (LLMs) from chatbots to agents capable of handling longer context and complex tasks is benefiting cloud vendors and infrastructure providers through increased demand for training and reasoning. Demand now extends to post-training verticals tailored to specific industries, as one AI cloud operator noted:
- “For example, automobile vendors, companies in the education sector, or companies in the multimedia application space. They all have training requirements. They're leveraging their own proprietary data to train proprietary models to meet their demands. And that, in turn, is driving higher utilization of our overall AI infrastructure.“
Application developers are also seeing success with a broadening spectrum of AI use cases. Beyond AI-enhanced internet search, platform companies are expanding AI deployment across business segments, including advertising and game design. As one noted:
- “Leveraging our LLM, we now offer comprehensive AI-empowered advertisement services. Spending creative ad production, placements and post-campaign analysis… And we are looking into the future that there might be AI-designed games.”
Importantly, these platform companies are beginning to monetize their AI investments successfully, both through direct AI searches and AI-empowered services. As one company explained:
- “For example, as we advance AI search transformation, we direct our model capabilities towards generating and selecting multi-model search results. And our users love it. Our cloud customers also love it. They're paying for our Search API (Application Programming Interface) for their Gen AI applications. Another example is our hyper realistic digital human technology, which now matches and even exceeds real human performance in the livestreaming e-commerce scenario. Our model is just better at convincing people to buy. Cloud customers are paying for these capabilities too. As we move into the second half and beyond, we will continue this acceleration.”
While the U.S. remains the epicenter for AI innovation and application, China is swiftly making its way in building a self-sustaining AI ecosystem, helped by strong policy support, solid AI research, and a robust supply chain that delivers high quality components at low costs.
Anti-involution campaign to benefit sectors differently
Beyond corporate-led initiatives, a series of headline and sector-specific policies, following July’s Central Commission for Finance & Economic Affairs meeting, have gained momentum across industries to address irrational competition and disorderly price-cutting, commonly referred to as “involution.” Many draw comparisons to the 2016-2018 supply-side reforms, which primarily targeted production overcapacity in traditional industries such as coal and steel. We can recall that the 2016-2018 supply-side reforms delivered tangible results, boosting economic growth and corporate profitability. However, given the current subdued macro environment, with a weak labor market and an absence of strong demand-side stimulus, the actual impact of this round of reforms bears watching.
Policymakers have not released a list of target sectors and execution details. However, the current landscape of price competition has extended to “new energy” sectors, including electric vehicles, batteries, solar, and even services such as food delivery and e-commerce. Compared with 2016-2018, the current initiative has been milder in intensity, with window guidance to encourage self-discipline, while the sectors covered seem broader in scope. By reducing deflationary pricing pressure and lifting margins, anti-involution measures are inherently supportive of corporate earnings and profitability, although the impact will depend on the level of guideline detail and the substitutability of products sold.
Industries with more explicit anti-involution guidelines and products that are similar in nature have seen sharply improved sentiment, and companies have expressed expectations for an inflection point in profit margins in the near term.
This is notable in the solar industry, which was more research and development intensive but redirected capital from investments to price cuts due to involution. As one polysilicon manufacturer noted:
- “one thing that's clear is that there has been consensus that selling below cash cost is unsustainable and very detrimental to the overall industry development… we are optimistic about the future of the industry and we believe we could see a turning point soon.”
For other industries that have bifurcated into low-price and innovation segments, the effects of anti-involution may differ with respect to price competition. For example, anti-involution may lead to reduced price wars in the automobile industry and stabilize profits. However, the ongoing anti-involution campaign may also mean that some automakers may struggle to leverage vertical integration to further fund price cuts for market share, while others with established technological advantages that are less impacted by price competition may invest more to differentiate.
Many market participants have traded on this theme positively thus far. However, the degree and pace of policy implementation may continue to vary across sectors, given the differences in the levels of anti-involution efforts and product differentiation dynamics, resulting in variations in the anticipated magnitude and timing of corporate earnings improvement.
Brands are expanding their market shares overseas
While the domestic market is undergoing positive changes, Chinese businesses are rapidly expanding internationally, with overseas growth frequently cited in earnings calls. This aligns with our previous analysis on the globalization of Chinese intellectual property, from software technology to humanoid robots and innovative drugs.
A key industry accelerating its overseas footprint in both production and sales is the Chinese automobile sector. Manufacturers have demonstrated success, leveraging efficiency advantages over foreign competitors, with one reporting a doubling of 1H25 revenue year-over-year across Europe, the Middle East, South America, and Southeast Asia. Despite challenges such as low brand recognition, Chinese manufacturers have remained committed to overseas expansion, with one manufacturer noting:
- “The overseas market is both an opportunity and a challenge. For example, as it is not a very well-known brand overseas, the overseas market expansion will take time and effort, but we have enough patience and resolution. And in fact, the overseas market expansion has been one of the top medium- to long-term strategies. On the R&D front, we have built development centers in Germany and the U.S. On the sales channel side, we are formally … building an overseas (after-sales services) team.”
Internet platform companies have also shown continued interest in overseas expansion, particularly in food delivery and e-commerce. In new markets, rapid success has been noted, with one food delivery company quickly rising to a top-two provider in Saudi Arabia after entering the market last September. In existing markets, improving consumer traction has reinforced renewed investments, as one e-commerce company commented:
- “we see steady consumer demand and consumer trust in our platform is gradually growing... The vision of our global business has always been to bring more high-quality products to consumers worldwide. Looking ahead, we will continue to invest in our supply chain capabilities, service capabilities and compliance capabilities to strengthen the fundamentals for the next phase of the global business.”
Investment implications
From AI developments to anti-involution and globalization, the crossroads of these tailwinds should continue to support Chinese equities over the medium- to long-term horizons, though the degree of success will vary across themes and industries. This makes the fourth plenum in October a key meeting to monitor for the government’s next five-year plan. Anti-involution may imply lower industrial investments but may also lead to a redirection of government efforts to support the services sector and consumption. In the absence of consensus expectations for further large-scale policy stimulus, macro fundamentals may only improve at a gradual pace in the near term, and equity markets may continue to favor emerging opportunistic themes.
Diversification remains critical, and portfolios with both onshore and offshore equities are ideal. With the three aforementioned themes and the potential emergence of new ones, we believe the opportunity set offered by offshore equities could continue to expand relative to onshore equities. A combination of higher offshore exposure, deployed through robust active management, may be considered for portfolios over the medium term.