After three straight years of losses (2021–2023), the FTSE China RIC Capped Index is showing signs of a fragile recovery, now up more than 18% in US dollar terms year-to-date through June 26. The recovery is led by gains in the communications, financial, tech and healthcare sectors, which are prompting investors to shift from caution in China to curiosity.
Markets were buoyed recently following the confirmation of a US-China trade framework deal that would allow rare-earth exports from China and an easing of US tech restrictions. Of course, a volatile trade environment and US-China tech decoupling may continue to pose challenges for Beijing. Consider, however, that even with World Bank global growth expectations now at 2.3% — a 20-year low outside of major crises — China’s growth forecast remains stable at 4.5%.
Funding talent
A key driver of China’s progress is its deepening investment in talent and education, particularly in AI and other strategic fields. China’s Ministry of Education has launched a broad campaign to integrate AI education across not just its top-tier universities but also vocational institutions and secondary schools, which stands in contrast to the US’s unusually strained relationship between the federal government and higher education institutions at present. University AI programmes in the US are reportedly experiencing more restrictive federal funding conditions this year. Several programmes are facing abruptly frozen or cancelled National Science Foundation funding for researchers.
According to Stanford University’s 2025 AI Index Report, there has also been a noteworthy reduction in the performance gap between the top AI models of the US and China — a mere 0.3%. While the US maintains its lead in quantity, Chinese models have rapidly closed the quality gap. In 2023, China’s top models lagged behind those of the US by nearly 20 percentage points in several benchmark tests. Just one year later, this gap has narrowed substantially.
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The progress, analysts say, stems from a coordinated national strategy, accelerated investment in AI education and deep integration between state-backed firms and research institutions, which are enabling faster commercialisation of AI across sectors. In one quirky example, a leading mobile payments and lifestyle app in China has deployed a tool that helps users detect hair loss.
China’s capital expenditure on AI is expected to reach nearly US$99 billion this year, representing a 48% surge over 2024. More than half of this funding is likely to come from government sources. Meanwhile, public sentiment in China is notably more positive towards AI. Edelman’s 2025 Trust Barometer found that 72% of Chinese respondents say they trust AI, compared to only 32% in the US — a confidence gap that underscores differences in regulatory environments, infrastructure and cultural adoption.
Market valuations
Beyond the AI realm, we believe that Chinese equity valuations remain reasonable. The market currently trades at 13.5 times forward earnings — just below its 10-year average and at a steep discount: 50% to India, 24% to Taiwan and 17% to the broader emerging market index.
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This relative undervaluation, paired with an uptick in initial public offering (IPO) activity and tech leadership, makes a strong case for re-engaging with broad China exposures. Hong Kong’s capital markets, long subdued by regulatory uncertainty and sentiment shocks, have also staged a comeback. This indicates to us a resurgence of private sector confidence and a revival in investor demand. We believe that broad China exposures, including both A-shares and offshore-listed securities, provide a comprehensive opportunity to participate. Given Beijing’s recent progress in US trade negotiations, China’s equity market may finally be transitioning into a more compelling value opportunity, according to our analysis.
Volatility remains a factor, but for investors with a long-term perspective and an appetite for near-term fluctuations, we believe current entry points may offer potential upside. After years on the sidelines, diversification through Chinese equities may again earn its place in global portfolios.
Dina Ting, CFA, is head of global index portfolio management at Franklin Templeton Exchange-Traded Funds
