China’s Market Resurgence: Is the Rebound Here to Stay?

China’s economic and financial markets have seen a significant turnaround, but is this revival sustainable? Investors have long debated China’s prospects, with concerns about regulatory risks, trade tensions, and structural debt issues clouding sentiment.

However, recent market performance has sparked renewed interest. This article explores the key themes shaping China's comeback and whether the momentum can last.

Foreign Investors: Will They Return?

Despite China's market rally, foreign investors remain cautious. At its peak in 2021, around 40% of global emerging market funds had exposure to Chinese equities; today, that figure stands at 25%. Most of the inflows into Chinese stocks have been driven by domestic investors, especially in technology and IT sectors.

However, with policymakers introducing market-friendly initiatives and China's consumer demand gradually recovering, a broader market uptrend could entice more global funds back into Chinese assets.

Tariff Risks: Are They Fully Priced In?

Trade tensions between the U.S. and China have long been a market overhang, but the actual economic impact may be more limited than perceived. Recent 10% tariffs on Chinese goods are estimated to shave only 0.3 percentage points off GDP and cut CSI300 corporate profits by around 0.5%. This suggests that while tariffs remain a challenge, their direct economic damage is relatively contained.

More importantly, China is adapting by diversifying its trade relationships, enhancing domestic supply chains, and investing in long-term structural reforms to bolster economic resilience.

China’s Innovation Boom: A Game Changer?

China has emerged as a global innovation powerhouse, leading in areas such as autonomous driving, electric vehicles (EVs), drones, and artificial intelligence (AI). Yet, this innovation potential remains underappreciated in equity valuations.

The market is still trading at a discount compared to other emerging markets.

A recent catalyst has been the rise of AI-driven companies like DeepSeek, which has fueled renewed investor enthusiasm.

If foreign investors begin to recognize China’s technology edge, a re-rating of the stock market could follow.

The Property Market: A Turning Point?

One of China’s biggest economic drags has been the real estate sector. However, signs of stabilization are emerging. In top-tier cities, property sales have picked up, and state-owned developer Vanke is receiving financial support, reinforcing expectations of a market turnaround.

While millions of unsold homes remain a concern, government interventions, land repurchases, and increased liquidity support for developers suggest that the worst may be over.

Local Government Debt: A Manageable Risk?

China’s local government debt, particularly through local government financing vehicles (LGFVs), has been a significant concern.

However, two key developments have helped ease investor worries: lower borrowing costs and expanded municipal bond swap programs. These measures are helping local governments refinance debt and reduce financial instability risks.

Final Thoughts: Is China’s Revival Sustainable?

China’s recovery is supported by a mix of policy support, market rebalancing, and technological advancements. While risks remain—especially geopolitical tensions and structural economic adjustments—the improving investor sentiment and government commitment to growth suggest that China’s market rally may have legs.

For global investors, the opportunity lies in China’s discounted valuations, improving fundamentals, and long-term innovation potential. The key question remains: will the rest of the world take notice before it’s too late?