Tom James, investment analyst, Hargreaves Lansdown: “China’s economy grew 5% in 2025, achieving the government’s target and following the 5% growth also seen in 2024. The continued expansion included growth in exports, which pushed the country to a record trade surplus of $1.19tn. This came despite uncertainty caused by US-imposed tariffs. With Donald Trump’s return to the White House leading to an increase in geopolitical tensions, China made efforts to diversify its export market and deepened trading relationships with African and Southeast Asian countries. Domestically, weak consumption persists. While consumer sentiment is slowly improving, it remains negative and some way off the level seen before 2021’s property sector crash. Boosting consumer demand is a key government objective.
From a stock market perspective, the year was strong. The MSCI China benchmark rose 23.42% in the 12 months to the end of January 2026. This followed the positive end to 2024, when the government announced a series of stimulus measures to support the ailing economy. A stock market delivering growth is a welcome return to form for a country which endured a bleak period when recovering from a strict zero-Covid policy. That said, China underperformed the broader emerging markets sector in the last 12 months. China makes up over a quarter of the index but its performance lagged peers like Taiwan and South Korea. Despite this recent reversal in performance, investors continue to shun China as a standalone investment. Flows into the IA China/Greater China peer group were negative once again in 2025, although money left these funds at a slower rate than in 2022-2024.
What can we expect this year?
The target for economic growth this year has yet to be finalised by the government, but it’s expected to come in at 4.5% - 5%. For a country that, Covid years aside, finds a way to reach its targets, this is an important acknowledgment that growth may be slowing. Remarkably, it would be the lowest target set by the government since the 1980s. China will aim to operate a ‘moderately loose’ monetary policy in 2026, as part of continued attempts to raise domestic demand. Interest rates have already been lowered from 3.65% at the start of 2023 to the current 3%. The People’s Bank of China are balancing a deflationary environment with a currency that remains weaker.
China’s latest Five Year Plan, the government’s 15th set of initiatives since the first in 1953, covers the years 2026-2030. At the centre is expected to be a focus on modernising industries and establishing a technological self-reliance. With AI innovation a dominant theme in global markets, China has often found itself on the wrong side of export controls. The US has frequently placed strict controls on China’s ability to acquire the most advanced semiconductors, including those required by AI technologies. As a result, China has been forced to develop these technologies domestically. Many Chinese companies, such as semiconductor manufacturer GigaDevice, are opening themselves to foreign investors in a bid to fund further research and development. The reaction of investors to new listings suggests these companies have plenty to offer. One year on from the launch of China’s DeepSeek AI model that shook global markets, more Chinese companies are preparing to launch their own low-cost AI platforms.
Company valuations in China have risen as the market has started to perform, but they remain lower than both broader emerging markets and global markets. Pair this with expectations of robust earnings growth, particularly from technology and consumer discretionary sectors, and China has a potentially compelling case for attracting investors once again.
While issues that have plagued China’s economy in recent years persist, there is evidence that things are beginning to improve. That said, there’s still some way to go. This leaves plenty to watch as we enter the Year of the Horse. According to Chinese astrology, the Horse is confident, agreeable, and responsible. To an investor focused on the long term, these are promising attributes. A word of warning though – the Horse also dislikes being reined in.
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