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Within Asia ex-Japan portfolios, few allocation decisions carry as much weight, or as much misconception, as the one on China. For investors weighing how much conviction the region’s largest market deserves, there is often a gulf between perception and reality.
For investors weighing an allocation to China, there is often a gulf between perception and reality. The credit market tells a revealing story: the yield on the 10-year Chinese government bond sits at just 1.7%, against 4.5% on the 10-year US Treasury. China’s debt-to-GDP ratio remains low1 relative to other major economies, household savings are high, and inflation is under control (1.2% in May2). Add in high levels of energy self-sufficiency, underpinned by substantial coal reserves and a large renewables sector, and China has been notably insulated from the economic fallout of recent geopolitical shocks. As a global leader in green energy and electric vehicles, it is also well placed to benefit from surging demand in both categories.
This macro strength reflects a deliberate transformation. Beijing is steering the economy away from low-end manufacturing and property-led growth and toward higher-value industries such as technology and advanced manufacturing. Export growth is strong, and the trade surplus continues to widen.
AI cutting edge
Nowhere is this shift clearer than in artificial intelligence. China now sits at the forefront of the global AI boom. While Taiwan and South Korea lead in logic chips and memory, the bulk of AI data centre infrastructure, including racks, power supply, energy storage, cooling systems and optical networking, is manufactured in China.
Progress in domestic semiconductors has been rapid: integrated circuit exports reached US$201.9 billion in 2025, up 26.8% year-on-year, and hit US$103.5 billion in just the first four months of this year (an 83.7% YoY increase3). In AI software, China ranks second only to the US4, with a clear edge in cost competitiveness. Some Chinese models deliver 70-80% of the performance of leading global systems at less than 10% of the cost5, a dynamic fuelling rapid growth among Chinese software companies and an increasingly self-sufficient AI ecosystem, from models down to the chips and foundries behind them.
Figure 1: China’s leading export products
Source: China Customs, WIND, Macquarie Macro Strategy as at April 2026.
The property drag
The most persistent domestic headwind remains the property crisis that began five years ago. Residential prices peaked in the third quarter of 20216, and since then property investment has nearly halved, dragging down fixed-asset investment, jobs and growth. New housing starts, meanwhile, have plummeted by 70–75%, and peak-to-trough national price drops are estimated between 20–40%7. The relentless deleveraging that followed has weighed on consumer confidence and contributed to a deflationary backdrop.
Yet there is growing evidence the sector has turned a corner. The overhang of housing stock is beginning to ease as new-build activity collapses and government purchases of inventory for social housing take effect. Hong Kong residential prices have risen more than 10% since bottoming in the first half of 20258. Further afield, coastal cities such as Huizhou, a short high-speed rail ride from both Shenzhen and Hong Kong, are seeing early signs of rebalancing as young, often remote-working, professionals are drawn in by a compelling cost of living.
Equities disconnect
The prolonged property downturn has also reshaped household behaviour, encouraging a search for alternative investments. Domestic equities still represent a small share of Chinese household assets, leaving considerable room for growth, particularly with the Hang Seng Index’s dividend yield of 3-4%9 comparing favourably with bank deposit rates of around 1-1.5%10.
China’s equity market underperformance year-to-date owes much to capital being crowded out by the momentum-led tech trade centred on South Korea and Taiwan. The benefits of the AI boom, while real, have been unevenly distributed. Large-cap earnings face a tough backdrop, as last year’s consumption stimulus set a high bar for revenue growth while heavy AI investment adds near-term cost pressure. In a market still dominated by short-term capital, conviction has been slow to rebuild.
Figure 2: China’s equity market lags peers
None of this, however, negates the longer-term transition under way. China is now firmly established as the world’s number two player in AI and a leader in green energy and robotics. The disconnect between an economy that grew 5% in the first quarter of 2026 and an equity market still trading at a steep discount is precisely what creates opportunity. For patient, fundamentals-focused investors willing to look past short-term noise, China’s equity market offers some of the more compelling stock-picking conditions available today.
1 Country List Government Debt to GDP
2 China inflation stabilises in May as energy costs ease – Latest News
3 China General Administration of Customs (GACC)
4 Which countries are leading in AI?
5 Artificial Intelligence Index Report 2026
6 Real Residential Property Prices for China
7 China’s Property Rebalancing: The Long Road to a New Development Model
8 The Case for Hong Kong Real Estate
9 Hong Kong-Hang Seng Index Dividend Yield
10 Deposit interest rate – China
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