China’s equity market now comprises more than 6,000 listed companies, offering a broad and diverse opportunity set. Navigating such depth requires a clear macro framework.
Historically, China’s economy has alternated between expansion and deleveraging phases, each typically lasting three to four years. And each new expansion cycle has tended to be driven by a distinct set of structural forces.
Signals from last September’s Politburo meeting suggest the latest deleveraging phase may be drawing to a close. If a new expansion cycle takes hold, technology and consumption are likely to emerge as key drivers, with three investable themes coming into focus.
Consumer sector: platform-based businesses stand out
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Within the consumer sector, opportunities are increasingly selective rather than broad-based. This is because we are seeing diverging trends. Lower-tier cities have been less affected by the property downturn and remain relatively resilient. Spending patterns also vary by age group: retirees and younger consumers remain comparatively resilient, while consumers aged 35 to 50, often burdened by mortgages, tend to be more cautious. At the same time, consumption patterns are shifting away from physical goods and toward experiential and service-led spending.
In this environment, platform-oriented businesses stand out, including selected shopping mall operators, hotel chains, snack retailers and beverage franchise operators. While closely linked to consumer activity, these companies are less dependent on single product cycles and tend to demonstrate greater resilience across economic cycles.
Take the beverage franchise operators as an example. Some brands rely heavily on hit products and promotional campaigns to drive sales, leaving earnings vulnerable to shifts in consumer taste. Others compete on supply chain efficiency, scale advantages and disciplined franchise management. The key to their success lies in improving store-level productivity and lowering operating costs for franchisees, enabling them to earn more while spending less. From an investment perspective, such supply chain-driven models typically offer more stable earnings than those reliant on accurately timing product cycles.
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Technology: looking beyond surface volatility
Dispersion within the technology sector has also widened. Software companies have come under pressure amid concerns that artificial intelligence could disrupt existing business models, while hardware-related names have proved more resilient. This divergence appears driven more by sentiment and questions about the durability of capital expenditure than by a fundamental shift in long-term demand.
At this stage of the AI investment cycle, hardware-linked segments offer greater visibility. And we see three areas of focus.
First are components whose value rises alongside graphics processing unit (GPU) upgrades, including optical modules and power management systems.
Second are supply-constrained segments with pricing power, such as high-end ABF substrates and certain fibre-optic products. As AI-driven demand expands while capacity growth remains relatively contained, the potential for earnings improvement becomes more apparent.
Third are downstream players that may be entering an upswing, particularly in advanced packaging and testing.
Technology leadership is rarely permanent. We favour companies at the early stages of product upgrades or new product introductions, where penetration remains low. As adoption accelerates from a low base, revenue growth and margin expansion can reinforce one another, strengthening the overall investment case.
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Identifying traditional industries entering the harvest phase
A further opportunity lies in selected traditional industries. In sectors where capacity expansion is constrained but demand continues to grow steadily, the dynamic is shifting from the investment phase to the harvest phase. Examples include electrolytic aluminium, LCD panels and certain chemical segments. As supply discipline takes hold, profitability may improve, supported by stronger and more stable cash flows.
Selectivity over index heavyweights
Ongoing global volatility into the second quarter of 2026 will likely shape the investment backdrop broadly. In China, however, equity valuations are already well below prior-cycle peaks, leaving less excess to unwind.
In a market shaped by shifting sentiment, selectivity becomes increasingly important. Rather than concentrating on index heavyweights, investors may find greater value in companies with clear competitive advantages, durable growth prospects and leadership within niche segments. Over time, such an approach is more likely to deliver sustainable, high-quality investment outcomes.
Wenli Zheng is a portfolio manager for China Evolution Equity strategy at T Rowe Price
