Why policy, innovation and structural trends are set to drive growth in China

Despite near-term cyclical challenges, China’s structural strengths and innovation edge remain clear. Fidelity China Special Situations PLC portfolio manager Dale Nicholls shares his outlook for 2026 and explains where he is finding opportunities.

Key points

• The approval of the 15th Five-Year Plan and the recent meeting between Xi and Trump signal a more stable backdrop for Chinese equities.
• While improving geopolitical and economic conditions have buoyed equities, China’s innovation and long-term potential are yet to be fully recognised. Despite some cyclical headwinds, China’s leadership in advanced manufacturing, artificial intelligence, electric vehicles, automotive components, and digital infrastructure remains intact, positioning China as a global productivity driver.
• We believe selective opportunities exist in companies with durable earnings, exposure to automation and technology-enabled industrials, and the consumer sector.

What is your outlook for your asset class in 2026?

As we move into the latter stages of the year, the backdrop for Chinese equities appears increasingly constructive. At the time of writing, Chinese policymakers have approved the 15th Five-Year Plan proposal at the Fourth Plenum, reaffirming the country’s commitment to building a “moderately prosperous society.” The plan targets steady and sustainable growth, while emphasising technological self-sufficiency and stronger domestic demand. Meanwhile, the recent meeting between Presidents Xi and Trump in Busan produced a positive outcome, with both sides agreeing to extend tariff truces, suspend selected trade levies, and re-establish regular communication channels. Together, these developments point to a more predictable policy and external environment for companies and investors alike.

Policy support remains broadly accommodative in pursuit of these goals. Authorities continue to rely on targeted fiscal easing and flexible monetary tools to sustain growth and maintain liquidity.

A key element of the current policy framework is the government’s “anti-involution” campaign, which aims to address deflationary pressures arising from excessive and inefficient competition, including fast-growing sectors such as electric vehicles and solar energy, and in some traditional industries such as paper and cement. The intent is to reduce excess capacity and destructive competition, while preserving confidence among private enterprises. Early evidence suggests that, while existing capacity has not been materially reduced, the pace of new capacity expansion is likely to slow. This should allow excess supply to be absorbed over time, supporting margins and profitability if demand holds up. The potential for consolidation may still be underappreciated by the market.

A more stable property sector also remains critical to restoring consumer confidence. Recent trends have been mixed, with both new and existing home prices falling further in September as policy support waned during what is typically a strong season, although Tier 1 cities such as Beijing, Shanghai and Hangzhou continued to show modest gains. I continue to believe stabilisation in the housing market is important for a broader recovery in household sentiment, which in turn is key to reviving domestic consumption. For now, the consumer environment remains subdued, and although there is divergent performance across categories, pockets of resilience can be found. Well-positioned franchises adapting to shifting consumer preferences continue to show growth, while weak investor sentiment has created some of the most attractively valued opportunities in the market.

Despite these cyclical challenges, China’s structural strengths remain clear. The country continues to lead globally in manufacturing scale, innovation, and technological upgrading. Its export profile is shifting away from the US towards other emerging markets, while Chinese firms continue moving further up the value chain. Rapid adoption of AI, highlighted by the success of domestic champions such as DeepSeek, demonstrates the ongoing strength of China’s innovation. Combined with its leadership in areas such as electric vehicles and automotive components, digital infrastructure and smart manufacturing, these trends reinforce China’s long-term competitiveness and its role as a key driver of global productivity growth.

How are you looking to position your portfolio against this backdrop?

Following a strong recovery year to date, equity valuations have somewhat normalised. The MSCI China Index now trades at around 13 times 12-month forward earnings, still more than 40% below the prospective multiple of the S&P 500. Recent performance has become increasingly concentrated in high-beta and momentum-driven segments such as technology and AI, while widening dispersion continues to create selective opportunities where fundamentals and share prices have diverged. In this environment we remain focused on companies with durable earnings visibility, exposure to structural growth themes and disciplined capital allocation. We see particular promise in advanced manufacturing, automation, and technology-enabled industrials; areas aligned with policy priorities and capable of compounding value over time. The consumer sector remains a key area of focus given low expectations and valuations, along with the potential for consumer confidence to gradually return.