Financial markets may have gone to hell in a hand basket since the Iran war started, but that hasn’t stopped one institutional investor looking beyond the current mayhem to the future drivers likely to turbocharge China’s next growth phase.
While China is currently experiencing an economic funk, underpinned by structural stagnation and weak domestic demand, a lot of store is being placed in the country’s latest Five-Year Plan (2026-2030).
It’s hoped that China’s progressive shift from traditional sectors like real estate to high-tech innovation, green energy, and a more robust domestic consumer market can reverse the general slowing in GDP growth of 7%-plus experienced over the last decade.
A foundation for future growth
According to a Government Work Report, China targets economic growth of 4.5% to 5% this year.
While these numbers aren’t going to shoot the lights out, the report expects the next five years to not only lay a solid foundation for achieving the goal of doubling China's 2020 per capita GDP by 2035 but also serve as a source of stability for future global economic growth.
Rather than being couched as overly ambitious, analysts believe China’s range reflects a more pragmatic assessment of global uncertainties, while also focussing on high-quality development.
With China now entering the early stages of a new economic expansion cycle, now is the time to identify what investment opportunities it will bring with it.
Wenli Zheng, portfolio manager for China Evolution Equity Strategy at T. Rowe Price, reminds investors that with the country’s latest deleveraging phase potentially winding down, a clearer macro framework will make it easier to identify opportunity sets for the country’s 6,000 listed stocks.
Assuming the new expansion cycle takes hold and technology and consumption emerge as key drivers, Zheng suspects three investable themes are likely to take centre stage.
Consumer sector: Platform-based businesses stand out
While opportunities within the consumer sector are increasingly selective - rather than broad-based - Zheng also reminds investors that consumption patterns are shifting away from physical goods and toward experiential and service-led spending.
While younger consumers remain comparatively resilient, consumers aged 35 to 50 often burdened by mortgages, tend to be more cautious.
“In this environment, platform-oriented businesses stand out, including selected shopping mall operators, hotel chains, snack retailers and beverage franchise operators,” said Zheng.
While closely linked to consumer activity, these companies are less dependent on single product cycles and tend to demonstrate greater resilience across economic cycles.”
Zheng Cites beverage franchise operators as an example, with some brands relying heavily on hit products and promotional campaigns to drive sales, leaving earnings vulnerable to shifts in consumer taste.
From an investment perspective, Zheng looks to supply chain-driven models, which typically offer more stable earnings than those reliant on accurately timing product cycles.
Technology: Beyond surface volatility
At this stage of the AI investment cycle, Zheng believes hardware-linked segments offer greater visibility and sees three areas of focus.
- Components whose value rises alongside GPU upgrades, including optical modules and power management systems.
- Supply-constrained segments with pricing power, such as high-end ABF substrates and certain fibre-optic products.
- Downstream players that may be entering an upswing, particularly in advanced packaging and testing.
As AI-driven demand expands while capacity growth remains relatively contained, the potential for earnings improvement becomes more apparent.
Given that technology leadership is rarely permanent, Zheng favours companies at the early stages of product upgrades or new product introductions, where penetration remains low.
“As adoption accelerates from a low base, revenue growth and margin expansion can reinforce one another, strengthening the overall investment case.”
Traditional industries entering the harvest phase
Then there are opportunities lying within selected traditional industries where capacity expansion is constrained, but demand continues to grow steadily.
In other words, where an entity is mature and market growth is slowing, further investment will not significantly increase revenue.
Unsurprisingly, Zheng is witnessing a shift from investment to harvest phase, and he cites examples including electrolytic aluminium, LCD panels and certain chemical segments.
“As supply discipline takes hold, profitability may improve, supported by stronger and more stable cash flows,” he said.
Look beyond index heavyweights
While ongoing global volatility into 2Q 2026 will continue to shape the overall investment backdrop broadly, it’s important to note that in China, equity valuations are already well below prior-cycle peaks, meaning there’s less excess left to unwind.
Clearly, in a market shaped by shifting sentiment, selectivity becomes increasingly important.
Rather than concentrating on index heavyweights, Zheng suspects investors may find greater value in companies with clear competitive advantages, durable growth prospects and leadership within niche segments.
“Over time, such an approach is more likely to deliver sustainable, high-quality investment outcomes.”
