By Nicholas Yeo, head of equities, China, Aberdeen Investments
China is entering the Year of the Horse with more momentum than most investors had expected a year ago. This feels like a market that can run fast, but where returns could be hard-earned and highly dispersed. Among the key drivers, AI traction, the anti-involution drive and any meaningful stimulus, as well a steadier renminbi (RMB) could extend market momentum with potential for a broadening out into the second half of 2026. Under such conditions, innovation, capital discipline and earnings visibility could reap rewards.
AI: China comes into its own
When I look back on 2025, I would single out DeepSeek, referred by some as China’s “Sputnik” moment, as the most significant trigger in awakening global investors to just how far and how fast China has come in innovation. It is not just the US that the whole world is betting on; China is now in the reckoning.
MIT economist David Autor has noted this shift in competition from “commodity furniture and tube socks” to semiconductors, drones, aviation, electric vehicles, shipping, fusion power, quantum, AI, and robotics. China’s “high-tech, low-cost, incredibly fast, innovative manufacturing” is what makes this contest different. The market is repricing China’s role from “a cheap factory” to a serious contender across high value-add supply chains.
We have yet to fully appreciate how rapidly China’s domestic AI eco-system is innovating around constraints, such as architecture choices, open-source diffusion, and engineering pragmatism that can compound quickly when capital is directed with intent and accompanied by policy support. We would expect to see more of how companies are turning workarounds into products, which then get adopted and used widely through the ecosystem. Here, “slowly and then all at once” could apply because oftentimes, incremental improvements can signal critical inflection points.
Within that context, I expect AI and tech to dominate the market narrative in the early months of 2026. It is less about AI as a story and more about the “plumbing” – the building out of the ecosystem to data-centre infrastructure, components, industrial automation and software layers that embed into workflows, and the less glamorous parts of the stack where demand visibility tends to be better. Winners will be the companies with the scale, data access, and balance‑sheet strength to monetise it sustainably.
Such a scenario makes for interesting, albeit volatile, market dynamics through the second half of 2026. If the AI and hardware sectors accelerate too quickly and valuations turn too demanding, a market rotation to defensives may happen earlier than expected. This could come after the March results season or the Two Sessions meetings in early March, where the central government is set to outline economic targets, fiscal plans, and policy priorities for the year.
See also: China’s resilience: Powered by talent and AI trust
Anti-involution: New versus old divide amid a market broadening
The market could broaden out in the second half, but that is likely to hinge on more than the anti-involution drive. While efforts to push back against destructive competition may help stabilise prices and margins, these in themselves might not be sufficient in reviving domestic growth. Given potentially slower export growth, the urgency for domestic demand stimulus is much higher this year. If policy support rises, restoring capacity discipline and demand could aid a resurgence of traditional sectors, including consumption, through earnings improvements.
That said, weak consumption trends are already reflected in recent macro data. The “new versus old” divide is likely to persist, with new consumption such as pet food companies guiding for higher growth ahead but the staples sector is still grappling with destocking. Beijing has been unequivocal in signalling a rebalancing towards domestic demand and in such an environment, we see resilience in owning consumer businesses with pricing power, channel control, and cash conversion.
Currency: More support for RMB going into the new year
Finally, we turn to currency, where the RMB looks better supported going into 2026. A narrowing US-China yield gap, near-term US dollar weakness, as the US Federal Reserve has been outpacing its China counterpart in cutting interest rates, and solid exports are underpinning RMB strength. A firmer RMB is usually supportive for China equities because it also signals steadier capital flows and improving risk appetite.
Into the home stretch: Back the thoroughbreds
In all this, focus on the quality companies with demand visibility, credible earnings paths, and cash flows that can fund their own growth. They tend to be in areas where China’s strengths in engineering and manufacturing are translating into structural and sustainable growth. Back the thoroughbreds for sustainable returns in the year ahead.
See also: Artemis: Why China is ‘unstoppable’ | Portfolio Adviser
