As irrational AI exuberance courses through global markets, it stands to reason that sky-high Chinese stock valuations might also appear divorced from real-world fundamentals.
The second-largest economy is slowing, after all, upping the odds that deflation isn’t going away anytime soon. And as Chinese equities rally to decade highs, it’s becoming increasingly vital for President Xi Jinping to close the gap between investor exuberance and financial reality in his US$19 trillion economy.
This means acting boldly and transparently to implement the 15th Five-Year Plan blueprint for “high-quality development” unveiled by Xi’s Communist Party in late October. It emphasizes technological self-reliance, more efficient manufacturing and a green transformation in the world’s second-most populous nation.
These priorities include increasing the role of domestic consumption in driving growth, leveling playing fields across industries and doubling down on Xi’s “Made in China 2025” scheme to dominate batteries, artificial intelligence, semiconductors, robotics, biotechnology, electric vehicles and other technologies of the future.
The problem, of course, is implementation. Since formally taking the reins in 2013, Xi has talked big about market forces playing a “decisive” role in China’s economic trajectory. Thirteen years on, the gap between rhetoric and reforms actually being put on the books remains yawning.
Xi’s inner circle appears to understand that Beijing will be under intense scrutiny to ensure the coming 2026-2030 era is one of frenetic change and disruption. As the party puts it: “The period covered by the 15th Five-Year Plan will be critical in this process as we work to reinforce the foundations and push ahead on all fronts toward basically achieving socialist modernization by 2035.”
Remaining focused on these long-term aspirations in the months ahead could prove quite challenging, though. As deflation deepens and US tariffs hit global demand, the temptation will be to prioritize short-term stimulus to keep economic growth near 5% over supply-side upgrades.
This will be a difficult balancing act for Premier Li Qiang to pull off in 2026. And, for now, many stock investors seem happy to give Team Li the benefit of the doubt.
“Investors hold a lean-forward sentiment because they are underexposed in their portfolios to these AI trends in China,” says JPMorgan strategist Mark Fiteny.
This is partly thanks to global funds reallocating investments to China’s biggest and most liquid corporate names. And partly a response to this year’s headline-making tech successes — from EV maker BYD to AI upstart DeepSeek to e-commerce juggernaut Alibaba Group, strengthening its core businesses by going big on AI.
And since China Inc allocations remain below their 2015-2021 peak, the rally in Shanghai stocks seems to have real legs.
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“The recovery of China tech stocks from their trough is still at an earlier stage than the rise of the Nasdaq,” Fiteny says, noting that price-to-earnings multiples of Chinese tech companies are lower than comparable US rivals. “There’s still a delta built into where things are trading, but it has been converging.”
US investment firms running global funds are showing an increasing appetite for Chinese equities, says Fiteny. “Hong Kong-listed stocks and the upcoming [listing] pipeline offer diversification from their Western holdings with a broad mix of growth drivers.”
On the financial front, Chinese brokerage stocks jumped this week on news that state-owned China International Capital Corp is acquiring two rivals, fueling hopes for accelerating consolidation in the nation’s $1.6 trillion securities industry.
CICC is taking over Dongxing Securities and Cinda Securities using share swaps, asserting that the move will support Beijing’s market reforms, reduce costs and raise shareholder returns.
It’s a win for Xi and Li, as this deal to create China’s fourth-largest investment bank with more than 1 trillion yuan (US$140 billion) in assets helps hasten the consolidation Beijing wants. It also makes CICC a bigger and more globally competitive investment bank.
This M&A move will help CICC “replenish capital” and “catch up to peers in terms of scale,” argue analysts at Citigroup. Analysts at Soochow Securities add that “the consolidation will further expand the reach of CICC’s wealth management business.”
Still, the cognitive dissonance of surging Chinese shares and the deflationary reality plaguing Xi’s economy is a sight to behold.
It’s “premature to declare an end to deflation,” says Carlos Casanova, an economist at Union Bancaire Privee. He notes that the 1.2% year-on-year increase in core consumer prices offered a false sense of comfort that prices are stabilizing. The data reflects “ongoing efforts to tackle overcapacity and price wars” in Beijing, not a return of pricing power, he says.
Commenting on the property crisis, former Finance Minister Lou Jiwei told a business forum that “this drags on the growth of consumption and amplifies the deflation trend.”
Sarah Tan, economist at Moody’s Ratings, says that “while prices have fallen less steeply in recent months, the trend points to weak industrial demand. Persistent overcapacity, the result of years of heavy investment, is suppressing pricing power and squeezing profit margins.
“Prolonged deflation erodes profits, hurts business confidence, encourages consumers to delay purchases, and raises debt burdens, potentially entrenching weak domestic demand.”
Industrial production tells a similar tale, Tan adds. October output grew 4.9% from a year earlier, marking a major deceleration from September’s 6.5% pace. Growth moderated in areas adjacent to the ailing property sector. Notably, the annual decline in cement production was nearly twice September’s retreat at 15.8%.
On the bright side, Tan says, output in high-tech manufacturing and the automotive, ship, rail and aerospace sectors held firm, fitting with their status as industrial production growth drivers.
For autos, a price war at home is driving output growth. Yet “without stronger consumption and external demand, China’s producers are at risk of becoming trapped in a cycle of weak prices,” Tan says.
Economist Innes McFee at Oxford Economics says that China erred in 2025 by doubling down on an export-led growth model, “pushing the economy further into deflation than we had feared, while still delivering a slight upside surprise for growth.”
Will China pivot away from this export-centric model decisively in 2026? That depends on the speed with which Xi and Li implement the new five-year plan.
The next step is implementing the 15th Five-Year Plan, which, if implemented as articulated, should be a meaningful move in that direction. China’s “reliance on exports leaves economic growth exposed to external uncertainties,” says Mingda Qiu, analyst at Eurasia Group.
That plan, Qiu says, “emphasizes the desire to make domestic demand a ‘reliable’ growth driver while initiatives such as tech self-reliance, import substitution, and supply chain resilience aim to mitigate vulnerabilities. Xi’s ‘high-quality development’ focuses on productivity growth through efficiency, technology upgrades, and AI integration across industries, while leaving non-strategic engines of growth like the property sector in the past.”
But as Macquarie Bank’s chief China economist Larry Hu notes, some of the most impactful shifts in Beijing’s strategies over the last 25 years were driven by factors outside those telegraphed by centrally decided five-year plans. They include China’s entry into the World Trade Organization and the more recent crackdown on the property sector.
Hu thinks the latest turning point is slowing export growth, which will increase the urgency to recalibrate domestic growth engines. That means prodding households to spend more and save less by creating bigger and more robust social safety nets.
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In the short run, analysts at Nomura Holdings write that “we believe Beijing will step up its supportive measures to stabilize growth” in the fourth quarter.
As all this is going on, the global AI frenzy is generating its own bull market in cognitive dissonance. It has helped the CSI 300 Index surge 16% so far this year, despite deflation and signs of a downshift in Chinese growth.
Bubble worries abound, of course. Scion Asset Management’s Michael Burry, of “The Big Short” fame, made headlines recently for shorting AI’s biggest stars, including Nvidia. News on Thursday that Nvidia reported fiscal third-quarter results that beat expectations for sales and earnings only intensified the bubble debate.
Yet to ensure gains in the broader stock market, it’s high time Team Xi stepped up efforts to end the property crisis once and for all, which continues to weigh on weak household demand.
Economist Eric Zhu at Bloomberg Economics notes that “China has faced deflationary pressures in recent months, recording declines in prices for August and September.
“The country’s GDP deflator — the broadest measure of prices — has been in decline for over two years, the longest streak since the quarterly data began in 1993. That deflationary spiral could be even deeper than what the official numbers show.”
Vibrant debt and capital markets are critical to catalyzing growth of all sectors, but particularly those in the high-tech space — the realm Premier Li has been elevating in recent months.
While it’s important that Beijing ends the regulatory volatility of recent years, greater international capital market participation would accelerate China’s move upmarket.
Currently, investors are giving Xi and Shanghai shares the benefit of the doubt. Fair enough, so long as Beijing steps up efforts to raise China’s broad game – not just in AI but the economy undergirding it all.
Follow William Pesek on X at @WilliamPesek
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