Chinese stability supports emerging market assets

China’s record trade surplus is helping economic growth but deepening domestic imbalances and global tensions. While geopolitical developments remain a prominent risk, we review improving prospects for the Chinese economy and assets in 2026.  

Even in the face of rising US tariffs, China recorded a trade surplus of USD 1.2 trillion in 2025. This striking resilience was helped by a rising share of exports to Southeast Asian nations, in part to circumvent US tariffs, and by China’s competitive technology and pricing. Stronger export momentum and our expectation of more domestic policy support mean we have raised our full-year China real GDP growth forecast to 4.3% for 2026. This would represent a deceleration from the 5.0% registered in 2025 but would be consistent with Beijing’s medium-term growth expectations. 

A rebound in domestic demand

As China’s persistently low inflation testifies, strong trade dynamics contrast with ongoing weakness in domestic demand. Retail sales and fixed asset investment growth decelerated sharply in the second half of 2025 as local governments used their proceeds from bond issuances conservatively. In response, the country’s authorities have pledged to support demand more effectively at home, and we expect additional fiscal stimulus worth around 1% of GDP throughout 2026. Recent rhetoric from officials suggests this may include measures to subsidise consumption, increase income transfers to households, and stabilise investments, with the central government playing a bigger role in projects. We expect this more proactive fiscal policy to ease deflationary pressures; we forecast average consumer price inflation of 1% this year, from around 0.1% in 2025.

Chinese exports will remain supported this year by robust global demand, the one-year trade truce with the US, and expansionary fiscal policies in major economies. That said, we expect the pace of export growth to slow somewhat in 2026, amid a government campaign to remove excess production capacity, raise production prices, and a steady proliferation of measures by other countries to stem cheap Chinese imports. Our core scenario also remains that US tariffs on Chinese exports will remain in place, even if the Supreme Court rules against those imposed under the International Emergency Economic Powers Act, since they can be reinstated using other means. 

Beijing’s recent guidance for a stronger yuan will create modest headwinds for exports and constrain monetary policy responses to a degree. For this reason, we expect limited monetary easing from the People’s Bank of China, and forecast just one interest rate cut in 2026. China’s choice to prioritise fiscal rather than monetary support allows policymakers to continue closely managing yuan movements. Yuan appreciation can help authorities avoid stoking additional tensions with trading partners: our 12-month target against the US dollar is 6.80.

Indeed, where there are clear advantages, we expect China to continue seeking opportunistic trade deals and conciliatory measures. On 12 January, Chinese authorities secured a framework agreement with the European Union to resolve a dispute over electric vehicle imports, while on 16 January, Canada and China secured a deal to lower import tariffs. 

We expect President Xi Jinping to seek to avoid any escalation in trade tensions at a scheduled meeting with US President Donald Trump in April. In November 2025, the two countries agreed a year-long truce on trade, with China lowering restrictions on rare earth exports in return for US restraint on export controls and sanctions. Neither side is motivated to renew tensions in 2026, given their significant mutual economic interdependence. 

Another year of AI and clean tech innovation

A period of calm in trade relations supports China’s outlook. Its purchase of more advanced semiconductor chips should facilitate the buildout of further data centre and computing capacity in 2026. We expect this to support private sector investment and growth, following a decline in fixed asset investment in 2025. We expect China’s share of global AI computing output to increase substantially this year. The country already generates roughly twice as much electricity at the US at roughly half the cost, giving it a key advantage in the AI race, and a partial counterbalance to the dominance of US tech giants at the frontier of AI innovation. 

A recent, more unpredictable turn in US foreign policy, including threatened tariffs on NATO allies over Greenland and military actions in Venezuela, could also hasten China’s push for energy security, and boost its renewable energy production and buildout. China’s strategic priority is to reduce its reliance on hydrocarbon imports from US spheres of influence. Its vulnerability here has been highlighted by turmoil in Venezuela and Iran, which have been key exporters of oil and gas to the country. China’s aggressive pursuit of a net-zero economy is therefore a credible commitment that will likely generate results in the foreseeable future, and its push for electrification underscores this urgency. 

Economic stability in China benefits emerging markets

Despite geopolitical tensions, broad economic stability from China in 2026 should help anchor growth in other Asian economies. This supports our preference for emerging market assets. Our portfolios are currently overweight in emerging market equities, which offer higher earnings growth at a more reasonable price than those in developed markets, and in emerging market hard currency bonds. The latter offer attractive yields with stronger credit quality than corporate bonds with similar yields. 

Preference for Chinese equities

Within emerging equities, China is one of our preferred markets. Having lagged the broader MSCI Emerging Market Index since October, we now see opportunities in Chinese equities as we approach the policy window around approving the country’s new Five-Year Plan in March. We expect attractive equity yields and low investor positioning to drive continued domestic and foreign inflows and support a rise in valuations. We also expect earnings growth to accelerate to 9% in 2026, from 3% in 2025. 

Among Chinese equities, we see particular opportunities for tech firms, which are benefiting from rising power capacity and support from authorities’ push for technological self-sufficiency. Chinese tech firms still trade at a meaningful discount to their US peers, while offering stronger earnings growth and faster adoption of advanced technologies. This makes them one of our top convictions for 2026.