China’s equity markets are staging a comeback, but not all boats are rising equally. Valuation gaps remain, policy is pulling levers, and tech is stealing the limelight. Nicholas Yeo, Head of China Equities at Aberdeen Investments, shared his latest outlook on this market.

What’s happening now in Chinese markets?

Two key trends

1 Southbound flows are rewriting the script

Mainland investors have poured close to HK$1 trillion into Hong Kong stocks this year, already surpassing 2024’s full-year tally.
Policy tailwinds, including government’s push for buybacks and “market-value management”, are fuelling demand for dividend-rich SOEs.
Easing local funding conditions and lower interbank rates in Hong Kong are also supporting risk appetite.
Southbound funds from Mainland investors have flown mainly into internet leaders, innovative medicine and new economy sectors YTD.
YTD by industry, financials, consumer discretionary and IT have been the most-favoured sectors for southbound funds.
Southbound now accounts for nearly a quarter of Hong Kong Exchange’s turnover.

Chart 1: YTD Southbound cumulative inflow at HKD990bn, 123% of 2024 full-year inflow

Source: BOFA, A Share update, 28 August 2025

2. Leadership bifurcation: AI/semis‑heavy onshore benchmarks and HK tech have led the rebound

Tech is the star. The Hang Seng TECH Index has surged nearly 70% year-on-year, while onshore STAR Market names in AI and semiconductors are up more than 30% YTD.
The CSI 300 has re-rated to ~14x earnings—still below its five-year average—suggesting room for further upside if stimulus sticks.

Chart 2: Southbound net inflow YTD in 2025 (by industry)
A graph of growth in a graph

Outlook

We continue to observe reduced style headwinds in the China market and a better backdrop for our fundamental approach, which gives us confidence for the rest of the year.

The onshore equity market is playing a growing role in Chinese society; reforms and policy support for markets continue. The market is an important mechanism in driving capital to innovation-linked sectors. We continue to see a growing number of opportunities in the A share space.

We remain incrementally positive following the policy pivot late last year, and external pressure may prompt a greater focus on domestic stimulus, which is key to turning the economy around. Recent policies by the government such as anti-involution have suggested that the authorities are taking steps to protect the economy.

There is an abundance of liquidity in the system with the size of bank deposits as large as the market capitalisation of the A-share markets. With interest rates remaining low, retail investors will look for higher yielding assets and the stock market is the prime destination for this money given the current state of the real estate market.

We believe that the A-share market is on the cusp of a sustained performance due to;
the aforementioned points;
a potential weakening USD;
compelling valuations versus not just the US market but also other EM markets;

And despite reaching new highs, the A-share market valuation is still below its 5-year average.

What’s ahead: Potential catalysts

1 Policy Implementation

Property and infrastructure in focus: Beijing continues small, targeted measures to support the housing sector and boost infrastructure spending, reflecting steady execution rather than big-bang stimulus.
Fiscal firepower: If August data stay weak, a September Politburo budget revision is possible. The emphasis remains on stabilising nominal growth without over‑committing, keeping flexibility for further action if momentum falters.
Policy mix rebalancing: Demand support pairs with “anti‑involution” supply curbs to fight deflation. We would look to the 15th Five‑Year Plan and Fourth Plenum in October for signals on growth priorities and consumption tilt. Direction matters more than magnitude, underpinning confidence and earnings visibility.

Table 1: China’s policies look to be moving in the right direction with incremental support for both supply and demand sides

2 Liquidity

Household cash rotation: Households built up about RMB26.5 trillion in extra savings during Covid. With deposit rates falling, around RMB5.5 trillion could move into markets in 2025. Some money is still sitting in non-bank products, but improving confidence should push more into shares and investment products, boosting demand for risk assets.

Chart 4: Since 2020, Chinese households have accumulated over Rmb7.2trn in excess savings

Risk appetite and external tailwinds: Trading activity and margin borrowing have hit record highs, showing investors are more willing to take risk. Money supply growth is picking up, and expected Fed rate cuts plus a weaker US dollar in the second half of 2025 should keep liquidity supportive. A steadier yuan and positive FX flows add to confidence.

Chart 5: A-share margin financing balance and as % of free-float market cap
A graph of a stock market

AI-generated content may be incorrect.

Supportive stance, calibrated tools: Regulators remain focused on supporting capital markets, and overall financial risks look under control. Liquidity is plentiful, though a strong rally could delay any reserve ratio cut. If needed, authorities can step in with targeted measures like state-backed buying or lending support—keeping intervention limited but effective.