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Technology and innovation present opportunities while structural reforms create a healthier, innovation-friendly investment environment
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FOLLOWING a strong year for global markets, 2026 has begun on a more volatile footing, shaped by fast-moving geopolitical developments and shifting global economic priorities. As investors adapt to these dynamics, China’s prospects are set to play a pivotal role in shaping expectations for the coming year.
As we head into the Year of the Horse, the Chinese market is starting to show investors renewed horsepower. Liquidity conditions and capital flows remain supportive across both onshore A-share and offshore Chinese equity markets, as policymakers continue to advance a measured policy agenda centred on consumption support, housing market stabilisation and structural reform.
Still, key risks persist, particularly around a subdued housing recovery, geopolitical uncertainty and lingering deflationary pressures. Nonetheless, consistent policy implementation and improving earnings visibility are likely to underpin domestic liquidity and attract foreign investors to Chinese assets.
Looking at 12 to 18 months ago, valuations were at extremely depressed levels. While the near-term environment remains uneven, the combination of targeted fiscal easing, monetary loosening and industrial upgrading initiatives continues to boost confidence in the medium term. Equity valuations have re-rated modestly but remain reasonable relative to historical averages and global peers.
The MSCI China Index rose 31.4 per cent in 2025, outperforming both US equities and global markets. Innovation-led themes, particularly technology and artificial intelligence (AI), drove this rebound following the announcement of DeepSeek’s AI model at the beginning of 2025.
Momentum has continued, reflected in several Chinese AI and technology listings in Hong Kong towards the end of 2025, which attracted strong investor interest. The government’s counter-cyclical policy stance has helped stabilise growth momentum over the past year, laying the groundwork for a more durable recovery.
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The key question now is whether this strength reflects improving fundamentals, or whether it largely represents a sentiment-driven re-rating.
The improving macro backdrop and emergence of new growth drivers support the outperformance of growth-oriented sectors. Technology and innovation continue to present compelling opportunities. The success of DeepSeek implies the result of sustained research and development investment and a broader innovation trend in China. Innovation extends well beyond AI into robotics, autonomous driving, next-generation mobility and advanced manufacturing.
Alongside this, structural reforms – including capital market liberalisation, supply-side modernisation, anti-involution measures and policies to support private enterprise – are helping to create a healthier and innovation-friendly investment environment. These reforms are improving capital allocation efficiency and encouraging innovation-led growth across sectors.
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Consumption remains central to China’s long-term growth ambitions. While household spending is subdued in the near term, reflecting cautious sentiment, the underlying foundations are improving. As the housing market gradually stabilises and employment trends improve, consumer confidence will follow.
This should help unlock significant household savings, activate pent-up demand and reinforce consumption as a key pillar of sustainable growth. This creates opportunities for active investors to access leading consumer companies in the world’s second-largest economy at attractive valuations.
Policy initiatives are aimed at boosting the service sector and encouraging wellness-oriented and experience-based consumption. This structural transition is creating pronounced divergence across industries and categories, with clear winners emerging in premium services, healthcare, online platforms, leisure and experiential retail.
Investing in fixed income markets with low correlations to major global peers can play a meaningful role in enhancing portfolio diversification. China’s fixed income market in 2026 offers an appealing mix of strong carry, relatively low duration, and diminishing systemic tail risks, though successful allocation will increasingly hinge on disciplined issuer selection.
China’s macro backdrop of controlled stabilisation, subdued inflation, and ample onshore liquidity, supports sovereign, financial, state-owned enterprise and quasi-sovereign credit, reinforcing a stable environment for investment-grade names. At the same time, ongoing property sector stress and weak private sector confidence continue to drive pronounced credit divergence, leaving high yield firmly carry driven and highly dependent on name-specific fundamentals.
Non-property high-yield sectors such as financials, utilities and gaming offer more resilient cash flow profiles, while property exposure must remain tightly curated and focused on state-linked or top-tier issuers with visible refinancing paths.
Geopolitical and trade dynamics, including rising structural risk premia and global rate volatility, add another layer of uncertainty, warranting a neutral to moderately constructive stance with a clear quality bias.
Overall, China fixed income remains supported by strong domestic liquidity, improving technicals, and declining default rates, but elevated dispersion and historically tight valuations argue for selective positioning, short to medium duration, and an emphasis on income generation through high-quality investment-grade and carefully chosen high-yield opportunities.
The Year of the Fire Horse is traditionally associated in Chinese astrology with dynamism, momentum and volatility. This year also marks the launch of China’s 15th Five-Year Plan, a pivotal policy roadmap that sets the direction for the country’s next phase of development.
With strategic priorities becoming clearer, investors can expect a greater focus on execution, as policy signals translate into tangible measures across key sectors in the months ahead.
The writer is head of investment directing, Asia Pacific, Fidelity International
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