As President Trump widens his tariff threats to other nations and China backstops its economy, investors are dipping back into a market they once shunned.

Photo: Illustration by Grave J. Kim

Investors have had plenty of reasons to give up on Chinese stocks in recent years. China’s economy is muddling through a rout in the property market that has dented consumer balance sheets and left households skittish to spend. Debt and an aging population dampen longer-term growth prospects. Foreign direct investment plummeted 99% over the past three years as companies reassessed their China exposure and Chinese leader Xi Jinping’s multiyear corruption and private sector crackdown damaged business confidence.

Adding to all the uncertainty is the threat of sky-high tariffs and a trade war with the U.S.

In emerging markets, sometimes the biggest gains come when things go from horrible to a little less so. The MSCI China Index (MCHI) is up 14% this year, making it one of the better performing markets globally and far outpacing the S&P 500 index’s 1% gain. Some of the worst-case scenarios are fading, forcing a rethink among even bears like Morgan Stanley’s China equity strategists, who in mid-February shifted from “deeply skeptical” to “cautiously more optimistic,” upgrading their stance on China stocks to equal weight versus the benchmark.

At the beginning of the year, investors worried that China could get hit with 60% tariffs on imports and be the Trump administration’s main trade target. But the early tariff salvos have been tamer than feared, fueling expectations that the U.S. and China could spend the coming months in the art of dealmaking instead of skirmishing. That, and fresh efforts by Chinese officials to backstop the economy, have sparked a dose of optimism in a country that many thought was uninvestible just a few months ago. Instead of shunning Chinese markets, investors are now searching for bargains.

Since the fall, Beijing has started to course-correct its approach to healing the economy, unveiling monetary and fiscal measures to put a floor under the economy and domestic market. The latest pivot came as Xi met with the country’s top technology leaders, including heads of artificial-intelligence and electric-vehicle companies and leaders of internet giants that had been in the regulatory doghouse for years. The reappearance of Jack Ma, Alibaba Group Holding’s once outspoken co-founder who became persona non grata after taking regulators to task in 2020, signaled that the technology sector may be back in favor and that Beijing is now more willing to support entrepreneurs. After the meeting, an official with the country’s top economic planner said it would further reduce investment barriers and improve private enterprises’ market access. 

The developments bring renewed attention to what is still one of the cheaper corners of the global market. The MSCI China trades at 12 times next 12 months’ earnings, compared with 22 for the S&P 500. For Beeneet Kothari, who manages $1.2 billion at hedge fund Tekne Capital Management, the setup for China is better than it has been in two years—and the bullish case goes beyond price and possible government stimulus.

“Now, you have the best investment thesis: innovation,” says Kothari, who began investing in Chinese technology companies with Stan Druckenmiller at Duquesne Capital in 2005. “That bear that has been lying dormant for the last three to four years has been reignited.”

The U.S. and China are still locked in an escalating economic and military rivalry, and the rapid-fire policies of the Trump administration—and China’s responses—ensure near-term volatility. Plus, Chinese rallies have fizzled several times as Beijing has failed to deliver on its strong verbal support. Another year of underwhelming stimulus that fails to heal the property sector and revive confidence could be a spoiler.

But on the geopolitical front, investors are taking comfort that China isn’t the sole target of the Trump administration. Early tariffs were directed at allies like Canada and Mexico, and plans for reciprocal tariffs—matching the duties and other barriers that countries levy on U.S. trade—could also hit Europe and India.

While the U.S. imposed 10% tariffs on Chinese imports and threatened on Thursday an additional 10% increase effective March 4, President Donald Trump punted on other measures, directing his team to assess the China relationship and its compliance with the Phase One trade deal struck in Trump’s first term. The administration also reversed course after initially suspending duty-free treatment of goods valued at under $800 that has allowed Chinese retailing giants Temu and Shein to flourish. The White House didn’t respond to requests for comment.

“Trump’s fundamental philosophy is: ‘Let’s make a deal,’ ” says Dennis Wilder, who served as the National Security Council’s director of China under President George W. Bush and currently is a senior fellow at Georgetown University’s Initiative for U.S.-China Dialogue on Global Issues. “For Trump, the struggle has never been ideological. It’s economic. He is a businessman, not a strategic military thinker.”

This past weekend, the White House released a memo outlining its “America First Investment Policy” that describes China as an adversary and outlines a way to promote foreign investment while bolstering national security. Among them: limits on Chinese investments in strategic sectors in the U.S. and restrictions on U.S. investments in Chinese semiconductors, biotech, and AI that could be aiding China’s military.

But many of these proposals had already been working their way through Congress and the Biden administration, and investment in both directions has already cooled. Kevin Carter, chief investment officer of emerging markets–focused EMQQ Global, described the memo as a “simple chess move in a grander plan for a China-U.S. ‘master deal.’ ” Like other investors, Carter sees Trump’s repeated remarks about his “great relationship” with Xi Jinping and hopes to meet with him in his first 100 days as a positive for the relationship. 

Derek Scissors, a senior fellow at the American Enterprise Institute, says the balance of power in this administration isn’t with the hawks. Robert Lighthizer, a protectionist who served as U.S. Trade Representative in the first term, once had Trump’s ear, but Elon Musk, who has various interests in China, now holds that advisory role, he adds. “I could make a list of 25 reasons why this administration is going to be soft on China,” Scissors says.

At a Brookings event on Tuesday, Illinois Rep. Raja Krishnamoorthi, ranking member of the bipartisan Select Committee on the Chinese Communist Party, said the party probably viewed Musk as an asset in any negotiations and as a way to bypass more hawkish members of the administration such as Secretary of State Marco Rubio and national security adviser Mike Waltz.

The administration’s trade fights with allies such as Canada and the European Union, and its move this past week to vote against a United Nations resolution condemning Russia for the war in Ukraine, also gave Beijing an opening. “He’s going after friends and allies with much more intensity than China,” says Wendy Cutler, vice president at the Asia Society Policy Institute and a former negotiator in the U.S. Trade Representative office. “China will look for every opportunity to facilitate wedges between the U.S. and its allies and partners.” 

While the Chinese want a deal, they are wary of striking a formal grand bargain, only for Trump to return later demanding more, according to consultants who have met with Chinese officials. But a lot can still be on the negotiating table, including China agreeing to buy agricultural products or energy—commitments it made last time but failed to fulfill—or investing in manufacturing facilities to answer Trump’s calls to bring production stateside. Negotiations could also include a transaction for ByteDance’s TikTok or even potential help with Ukraine-Russia talks.

Brookings Senior Fellow Robin Brooks expects tariffs on Chinese goods to rise another 10 percentage points from just under the 30% average he estimates is currently on Chinese goods. The U.S. might also tighten loopholes that have allowed China to avoid tariffs by building production in Mexico or Vietnam

Beijing will probably lean on fiscal stimulus to blunt the blow from tariffs. But the impact could be muted, especially if the U.S. doesn’t tighten those third-country loopholes. Even as China is relying more on exports, only 14% are to the U.S. directly, down from 20% in 2018 before the trade war started.

Tariffs and U.S.-China relations will keep markets volatile. But the major driver for Chinese stocks rests with Beijing and whether it can stabilize its property market enough to revive consumer and business confidence. 

The property market is in its fourth year of declines, hurting households’ biggest store of wealth as prices fall by as much as 60%. Millions of Chinese are still waiting for prebought homes as indebted developers struggle to deliver them and banks remain skittish about lending to them despite Beijing’s nudges. Vanke Group, the country’s biggest state-backed property developer, warned in late January of a multibillion-dollar loss, adding to prospective home-buyer wariness. 

But analysts see glimmers of improvement. Autonomous Research senior analyst Charlene Chu expects Beijing to support Vanke, which the market has taken as a positive. While property sales have picked up with recent stimulus efforts, and some of the biggest cities are seeing prices stabilize, Chu thinks more-aggressive measures are needed to keep momentum from fizzling. One positive: She expects the magnitude of property price declines to moderate this year. 

The next signal will come from meetings that start on March 4, when China’s top policymakers unveil the fiscal budget and growth projections for the year. Also expected are details on measures they have talked about in recent months, including more government bond issuances and potentially more fiscal stimulus, such as expanding trade-in programs to spur the buying of appliances and industrial equipment.

Beijing is likely to reserve some of its fiscal stimulus. The economy has gotten a boost in recent months from strong export demand as companies prebuy ahead of potential tariffs, and officials want to get a better handle on U.S. policy before unleashing their firepower, Chu says. 

Optimists see even incremental stimulus creating a floor for the economy. Once consumers and businesses begin to feel better, the turn in the economy could be supercharged by the roughly $9.8 trillion net increase in Chinese households’ savings since 2020—roughly twice the gross domestic product of Japan, notes Andy Rothman, founder of China-oriented research firm Sinology.

China is making headway elsewhere in ways that could fuel the profits of some of its companies but create headaches for foreign competitors. China accounts for 30% of global manufacturing—a level matched only by the U.S. during World War II and Great Britain in the early stages of the Industrial Revolution, according to GlobalData TS Lombard head of China Research Rory Green.

Beijing’s aggressive investment in strategic sectors is paying off with more patents and more science, technology, engineering, and math graduates than anywhere else in the world. The combination of technological capabilities, state support, and a gigantic industrial base is helping Chinese companies outcompete its global rivals. Electric-vehicle maker BYD is already selling more cars than Tesla in much of Europe and more than Toyota Motor in Southeast Asia. Green sees Chinese companies ultimately outcompeting its rivals in robotics, aviation, and semiconductors over time. 

Tariffs and other restrictions could limit prospects of Chinese companies in the U.S., but Green expects much of the rest of the world to run on Chinese technology—Huawei Technologies’ 5G infrastructure, BYD cars, or DeepSeek’s AI, powering profits and valuations for the broad ecosystem of Chinese technology companies. 

One way to get broad-based access to these stocks, including smartphone maker Xiaomi, BYD, and battery maker Contemporary Amperex Technology, is through iShares MSCI China Multisector Tech. While it’s difficult for U.S. investors to access mainland stocks, the iShares MSCI China A exchange-traded fund (CNYA) offers a way to tap these domestic companies, which Goldman Sachs strategists see as more likely to benefit from Chinese stimulus measures and be more insulated from geopolitics.

Stockpickers are gravitating toward sectors aligned with Beijing’s priorities, namely technology and consumer products. That includes Alibaba, which is up 56% this year but still 59% below where it traded before the 2020 regulatory crackdown. 

Alibaba is one of those stocks with the AI glow, especially after Apple decided to use the company’s AI in its iPhones in China. Alibaba’s plans to allocate more than $52 billion to AI and its cloud business over the next three years also excites investors. “If it’s the beginning of a cycle and a company starts investing, you should be slamming the table trying to buy shares,” says Kothari.

Howie Schwab, manager of the Driehaus Emerging Markets Growth fund, prefers Tencent Holdings. With nearly 1.4 billion active users across its Weixin messaging app and gaming platform, Schwab sees the company poised to benefit from its own low-cost AI and that of others by powering its search product, improving advertising content, and targeting and converting all of that into e-commerce sales. 

One indirect beneficiary of expanding uses of AI—and Baidu, ByteDance, Alibaba, and Tencent’s aggressive capital spending plans—is data center operator GDS Holdings, says Kothari. The company improved its profitability during the bear market and is pushing beyond China to expand into southeast Asia. “GDS is the landlord of China AI,” says Kothari, whose fund is one of the company’s largest shareholders.

U.S. efforts to restrict China’s access to advanced chips has spurred Beijing’s efforts to create its own chip ecosystem. Thea Jamison, founder of emerging and frontier markets–oriented Change Global Investment, is avoiding companies making cutting-edge chips that could get caught in the crosshairs of trade or investment restrictions. She favors chip makers like Hua Hong Semiconductor, which makes more-mature nodes used for industrialized infrastructure.

With Hua Hong trading at 12 times 2025 enterprise value to earnings before interest, taxes, depreciation, and amortization, or Ebitda, Jamison expects 13% sales growth this year as China’s second-largest foundry focuses on higher value-added products. Shares have surged amid AI fever, but Hong Kong–listed shares trade at a 33% discount to those listed in the A-shares market. 

After the recent run-up in Chinese stocks, Jamison is becoming choosier, favoring companies with a clearer path to earnings like Tingyi, an instant-noodle and nonalcoholic-beverage maker that benefits as consumers seek cheaper food options. Tingyi has also improved profitability through the economic slowdown with up to 20 new products introduced each year, operational improvements, and price hikes, Jamison says. HSBC analysts have a 13.70 Hong Kong dollar target on the company, implying another 15% gain.