China Market Forecast: AI Momentum and Policy Bets Lift Sentiment

Chinese private sector activity slowed midway through the fourth quarter, underscoring domestic demand challenges. While domestic demand across manufacturing and services waned, external demand picked up, suggesting a turnaround from the US tariff-driven slump in exports.

However, Mainland China and Hong Kong equity markets bucked the broader market trend on December 1. The indexes climbed toward their 2025 calendar year highs. China’s advancements in the AI space have shone a light on Mainland China and Hong Kong-listed tech stocks, signaling a bullish short- to medium-term outlook.

Crucially, Mainland China and Hong Kong equity markets trended higher on December 1, despite the surge in Japanese Government Bond (JGB) yields triggering a yen carry trade unwind.

Below, I will explore the key drivers behind recent gains, the medium-term (3-6 months) outlook, and the key technical levels traders should watch.

China Manufacturing PMI Falls below Neutral

On Monday, December 1, Chinese economic indicators raised more red flags, following last week’s weaker-than-expected industrial profit numbers for October. Chinese industrial profits increased 1.9% year-to-date (YTD) in October year-on-year, down from 3.2% YTD in September.

The RatingDog China General Manufacturing PMI fell from 50.6 in October to 49.9 in November, signaling a mild sector contraction. Key takeaways from the November survey included:

• New order growth slowed.
• New export orders increased at the quickest pace in eight months.
• Manufacturers cut staffing levels to manage cost pressures.
• Average input prices continued to rise, but input price inflation increased at the softest pace in five months.
• Manufacturers continued to absorb rising input costs, leading to a fall in average charges.
• Hopes for policy support from Beijing contributed to an upswing in optimism.

Crucially, input and output price trends highlighted continued pressures on profit margins, signaling further job cuts. Weaker labor market conditions would weigh on consumer sentiment and further impact domestic consumption. These trends have persisted in 2025, challenging Beijing’s efforts to boost domestic demand through key policy measures, including subsidies.

Monday’s Manufacturing PMI followed Sunday’s National Bureau of Statistics PMI numbers. Notably, the NBS Non-Manufacturing PMI fell from 50.1 in October to 49.5 in November, another potential headache for policymakers.

Economists Signal 2026 PBoC Policy Easing

However, expectations of monetary policy easing overshadowed the weaker data, boosting demand for Mainland and Hong Kong-listed stocks. According to CN Wire, policy easing calls for 2026 included:

• PBoC rate cuts: 10-20 basis points (Morgan Stanley, China Galaxy).
• Reserve Requirement Ratio (RRR): 25-50 bps reduction (Morgan Stanley); 50 bps (China Galaxy).
• Tools: Targeted relending to support sectors.
• Focus: Stabilize growth, full employment, fiscal stability, and domestic circulation.

Expectations of further policy support in 2026 have led to upward revisions to GDP growth forecasts. Standard Chartered reportedly raised its 2026 GDP growth target from 4.3% to 4.6%.

Crucially, further policy support and upward revisions to 2026 GDP growth targets align with and support my bullish short- to medium-term outlook for Mainland China and Hong Kong equity markets.

Medium-Term Outlook Remains Constructively Bullish

Mainland China and Hong Kong equity markets avoided severe market disruption from the ongoing housing crisis and the US-China trade war.

An escalation in the US-China trade war briefly sent the CSI 300 and the Hang Seng Index to April lows. Despite US-China trade tensions and US tariffs on Chinese shipments, both indexes rallied to calendar year 2025 highs in October. These market trends contrast with the impact of previous events on sentiment, suggesting a stickier investment base.

These market dynamics would support rotation from other indexes to Hong Kong and Mainland China equity markets, supporting the bullish short- to medium-term outlook.

However, several downside risks to the bullish outlook linger, including:

• The absence of policy support from Beijing.
• An escalation in the US-China trade war.
• Rising unemployment, falling exports, and weakening domestic consumption.
• A contagion from the China Vanke debt crisis.

Given these downside risks, stop losses for the CSI 300 and Hang Seng Index at their June closing prices of 3,936 and 24,072 would seem appropriate for traders holding long positions through 2025

Technical Indicators Bullish for CSI 300: 2025 High in View

Mainland China’s equity markets opened modestly lower on Tuesday, December 2, with the CSI 300 falling 0.25% to 4,565. Despite the morning pullback, the CSI 300 remained above the 50-day and 200-day EMAs on the daily chart, indicating a bullish bias.

A break above last week’s high of 4,625 would open the door to testing the November high of 4,707. A sustained move through 4,707 will likely bring the 2025 high of 4,762 into play, with 5,000 the next key resistance level. Bullish momentum through Q1 2026 would enable the bulls to target the 2021 all-time high of 5,932.

Conclusion: Cautiously Bullish into 2026

In summary, the outlook for the remainder of 2025 and for 2026 looks bullish. All-time highs are in view for the CSI 300 and the Hang Seng Index.

Policy support from Beijing and improving US-China trade relations will be key for market trends. Stimulus measures aimed at supporting the housing sector, addressing unemployment, boosting domestic demand, and AI advancements would paint a bullish backdrop.

Discover strategies to navigate this week’s market trends here.