China is approaching the Lunar New Year on 17 February, entering the Year of the Horse with more momentum than most investors had expected a year ago. The country had delivered another year of 5% GDP growth in 2025[1], shrugging off Trump’s “liberation day” shock and generating a record-high trade surplus. Being one of the best performing asset classes, its equity market also delivered returns of over 30% in 2025[2].
Despite higher tariffs and the uncertainty generated by the shock of “Liberation Day”, the composition of Chinese growth has increasingly been skewed toward trade. The share of GDP growth accounted for by net trade rose to almost 33% (+2.4 percentage points)[3].
The higher share of growth accounted for by consumption (52%, +7.5% percentage points) contrasts with the weakness in retail sales as services spending came to the rescue[4]. Disposable income growth continues to outpace nominal GDP growth, helped by larger government transfers and despite the sharp moderation in property income. Stronger stock markets may also be playing a role in boosting spirits, even if household exposure to equities is still low.
Nicholas Yeo, Head of China Equities at Aberdeen Investments and fund manager of abrdn SICAV I – All China Sustainable Equity Fund and abrdn SICAV I – China A Share Sustainable Equity Fund, commented:
“The market has yet to fully appreciate how rapidly China’s domestic AI eco-system is innovating around constraints, such as architecture choices, open-source diffusion, and engineering pragmatism that can compound quickly when capital is directed with intent and accompanied by policy support. We would expect to see more of how companies are turning workarounds into products, which then get adopted and used widely through the ecosystem.”
“We expect AI and tech to dominate the market narrative in the early months of 2026. It is less about AI as a story and more about the “plumbing” – The building out of the ecosystem to data-centre infrastructure, components, industrial automation and software layers that embed into workflows, and the less glamorous parts of the stack where demand visibility tends to be better. Winners will be the companies with the scale, data access, and balance sheet strength to monetise it sustainably.”
Aberdeen sees potential to be long-term winners in equipment makers such as Naura and Accotest, and AI players like Cambricon and Montage, while global AI adoption and integration into consumer electronics should boost demand for hardware and data centre infrastructure through names like WUS Circuit, Innolight and Envicool.
In terms of domestic consumption, offline discounters and quick commerce are gaining share, favouring brands with strong logistics. Online competition is intense. Rising input costs are squeezing margins, and dairy demand is structurally weaker. Aberdeen favours yield-oriented and innovative names like pet food over traditional staples like beer and condiments. Yantai China Pet Food is an example of this theme, as a leading player with multiple brands in China and a growing pet snacks export business in overseas markets.
Nicholas Yeo added:
“On consumer sector, the “new versus old” divide is likely to persist, with new consumption such as pet food companies guiding for higher growth ahead but the staples sector is still grappling with destocking. The government has been unequivocal in signalling a rebalancing towards domestic demand and in such an environment, we see resilience in owning consumer businesses with pricing power, channel control, and cash conversion.”
“A narrowing US-China yield gap, near-term US dollar weakness, as the US Federal Reserve has been outpacing its China counterpart in cutting interest rates, and solid exports are underpinning RMB strength. A firmer RMB is usually supportive for China equities because it also signals steadier capital flows and improving risk appetite.”
Isaac Thong, Senior Investment Director of Asian Equities at Aberdeen Investments, and fund manager of abrdn SICAV I – Emerging Markets Income Equity Fund and Aberdeen Asian Income Fund Trust commented:
“With economic growth in China now settling at a long-term rate of 5%, companies are shifting their priorities, striking a better balance between growing their profits and returning profits to shareholders. This has been supported by government initiatives on corporate governance, which has encouraged higher payouts. Many companies have started to pay higher dividends, opening up opportunities for income funds.”
LSEG data[5] showed total cash dividends from the country’s 2,000 large and mid-cap firms rose to a record high of 3.4 trillion yuan ($468.84 billion) in 2023. This rose by 1.2% in 2024 and could rise a further 8.6% in 2025. Dividends have become a larger part of shareholder returns as a result. These initiatives have also helped improve the overall quality of Chinese companies.
Isaac Thong added:
“The overall income yield of the Chinese market, at 2.4%[6], is still relatively low. We believe companies have the firepower to pay higher dividends and that may bring more of China’s innovative companies in scope for income investors. In this way, the opportunity set for us continues to expand all the time.”
Robert Gilhooly, Senior Emerging Markets Economist, Aberdeen Investments, commented:
“In 2025, for the second year in a row, net trade was the main driver of growth, helping to offset a weaker contribution to GDP from investment. While firms cut prices to support exports, household spending on services was the unsung hero. Larger transfers from the government have provided a small offset, but wages and salary growth and ample savings largely explain spending.”
In January, the People’s Bank of China (PBOC) announced a raft of measures to support its lending programs, signalled that cuts to its main policy rates could be on the way and opened the door for further renminbi (RMB) appreciation. Officials also noted that there was room to cut the reserve requirement ratio (RRR), which would inject liquidity into the banking system. A large stock of maturing time deposits is expected to roll onto a lower rate this year.
Robert Gilhooly added:
“The record $1.2 trillion[7] trade surplus has made the People’s Bank of China (PBOC) more comfortable about a stronger currency. But, as well as questions about the rest of the world’s tolerance for China to further expand its share of global trade, there are risks that this embeds deflation, particularly while excess capacity remains.”
“Condoning a stronger currency could boost foreign investor enthusiasm for Chinese assets. It remains to be seen whether continued falls in house prices and time deposits rolling onto lower rates will encourage households to reallocate towards the stock market.”
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance
