Wall Street is optimistic about the recovery momentum of Chinese equities, citing accelerating AI adoption and "anti-involution" industrial policies as key supportive factors.
On December 3, JPMorgan upgraded its rating on Chinese stocks from "Neutral" to "Overweight" in its emerging markets equity strategy report looking ahead to 2026. The bank believes the market is in the early stages of recovery, with attractive valuations and relatively light investor positioning providing a solid foundation for potential upside.
The report notes that after a surge in Q1 2025 followed by a pullback, Chinese stocks now present an "attractive entry point." The team led by strategist Rajiv Batra identified multiple incremental catalysts building for 2026, concluding that "the risk of significant upside far outweighs the risk of meaningful downside."
JPMorgan emphasized that positive sentiment toward Chinese equities typically sets the tone for broader emerging market performance and active fund flows. Its base case projects the MSCI China Index reaching 100 by end-2026, implying 19% upside from current levels, with bull and bear case targets at 120 and 80 respectively.
The upgrade reflects JPMorgan's confidence in several structural improvements, including: - Accelerated AI adoption - "Anti-involution" policies boosting corporate profitability - Rising shareholder returns - Domestic liquidity reallocation
Early Recovery Phase: Valuations and Positioning Provide Margin of Safety The bank views current levels as an advantageous entry point, with the market still near cyclical lows. Chinese valuations remain reasonable compared to historically elevated levels in other major markets like the U.S., India and Taiwan.
Global active funds remain significantly underweight Chinese stocks, suggesting substantial potential inflows if sentiment reverses.
AI and Tech Innovation: China's "New Quality Productive Forces" Take Off The report identifies AI and technological innovation as key growth drivers, calling 2025 an inflection point for generative AI adoption in China, marked by releases like DeepSeek V3 and R3 large language models.
JPMorgan highlights China's "holistic approach" to AI development, encompassing: - Power generation (a key competitive advantage) - Open-source models - Native applications - Semiconductor and data center development
Tech giants are making major moves, with Alibaba planning a $53 billion AI/cloud investment program, while Baidu, Tencent and Kuaishou deeply integrate AI into operations.
Advanced manufacturing remains central to China's 15th Five-Year Plan, focusing on robotics, biotech and semiconductors. Humanoid robots (like Ubtech and XPeng) are commercializing rapidly, while biotech firms (such as Innovent Biologics) break global monopolies.
"Anti-Involution" and Shareholder Returns: Profitability Recovery JPMorgan sees "anti-involution" policies and improved shareholder returns as crucial for margin and ROE expansion. These policies aim to curb destructive price competition, reduce overcapacity and restore profitability across traditional (steel, coal) and emerging (solar, batteries, e-commerce) sectors.
Meanwhile, Chinese companies—especially SOEs—are boosting buybacks and dividends, reflecting better governance and financial health.
Liquidity Shift: Household Asset Reallocation to Equities Supportive macro policies and changing domestic liquidity patterns provide additional tailwinds. Notably, early signs show Chinese households shifting from cash/deposits to equities—with retail participation and mutual fund inflows rebounding in Q3 2025 for the first time in four years.
Given China's exceptionally high household cash holdings, this reallocation could drive significant future equity inflows.
JPMorgan concludes that combined policy support, earnings recovery and liquidity improvements should deliver both earnings growth and multiple expansion for Chinese stocks in 2026.
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