Low valuation, light positions! JP Morgan upgrades the rating of the Chinese stock market, optimistic about the acceleration of AI applications and the reversal of involution

Wall Street is optimistic about the recovery momentum of the Chinese stock market, believing that the accelerated application of artificial intelligence, the "anti-involution" of industries, and several other positive factors are supporting the market.

On December 3rd, according to news from the Chasing Wind Trading Desk, JP Morgan raised its rating for the Chinese stock market from "neutral" to "overweight" in its emerging markets equity strategy report looking ahead to 2026, stating that the market is in the early stages of recovery, with acceptable valuations and still relatively light investor positions providing a solid foundation for potential gains.

The report clearly points out that after a surge in the first quarter of 2025, the Chinese stock market experienced a pullback, which instead created an "attractive entry point." The team led by strategist Rajiv Batra believes that as we enter 2026, multiple incremental support factors are building momentum for the Chinese market, making a key judgment: "We believe the risk of a significant rise in 2026 far outweighs the risk of a significant decline."

The report emphasizes that "the positive sentiment towards the Chinese stock market often sets the tone for the overall performance of emerging markets and the flow of funds into active funds." Based on this, JP Morgan's base case predicts a target of 100 points for the MSCI China Index by the end of 2026, representing a 19% upside from the time of the report's release. Its bull case target is 120 points, while the bear case is 80 points.

Behind this rating upgrade is JP Morgan's optimism about a series of structural changes in the Chinese market, including the accelerated application of artificial intelligence (AI), "anti-involution" policies aimed at enhancing corporate profitability, increasing shareholder returns, and the reallocation of domestic liquidity.

Early Recovery: Valuation and Positioning Provide a Margin of Safety

JP Morgan believes that now is a favorable time to position in the Chinese stock market, mainly because the market is still in the bottom area of the cycle.

After a long period of adjustment, the risk-reward ratio of the market has become more attractive. The report analyzes that "therefore, valuations remain acceptable, and positions are still relatively light." JP Morgan's charts show that compared to other major markets (such as the United States, India, Taiwan, etc.) where valuations are at or near historical highs, China's valuation level is only at the average level post-global financial crisis.

Meanwhile, global active funds' allocation to Chinese stocks remains underweight. The report cites data stating that "global and international funds are still severely under-allocated to Chinese stocks." This "light positioning" situation means that once market sentiment reverses, there is significant potential for capital inflow.

AI and Technological Innovation: The Comprehensive Outburst of China's "New Productive Forces"

The report views AI applications and technological innovation as key engines driving the upward momentum of the Chinese market. JP Morgan believes that 2025 will be a "turning point" for the application of generative AI in China, marked by the release of DeepSeek V3 and the R3 large language model The report emphasizes that China has a "holistic approach" in the AI field, covering power production (a key advantage for China), open-source models, local applications, as well as semiconductor and data center development.

"If, as we expect, the 'AI race' ultimately becomes more about the cost-effectiveness and widespread deployment of AI capabilities, then China has a holistic approach—covering power production (a key advantage for China), open-source models, native applications, and the development of semiconductors and data centers."

• Giant Layouts: The report mentions that Alibaba has planned a $53 billion AI/cloud capital expenditure plan, while companies like Baidu, Tencent, and Kuaishou are deeply integrating AI into their operations.

• High-end Manufacturing: China's 15th Five-Year Plan places technological self-reliance and advanced manufacturing at its core, focusing on robotics, biotechnology, and semiconductors. The report points out that humanoid robots (such as UBTECH and XPeng) are rapidly commercializing, while biotechnology companies (such as Innovent Biologics) are breaking global monopolies.

"Anti-involution" and Shareholder Returns: Corporate Profitability Recovery

At the corporate profitability level, JP Morgan focuses on the "anti-involution" policy and the enhancement of shareholder returns, believing that these two factors will effectively improve companies' profit margins and return on equity (ROE).

The report describes the "anti-involution" action as "a significant policy shift aimed at curbing destructive price competition, reducing excess capacity, and restoring profitability," with a wide-ranging impact that includes not only traditional industries like steel and coal but also emerging fields such as solar energy, batteries, and e-commerce.

JP Morgan believes that while this policy may pose a drag on short-term economic growth, it is "quite positive for the profits and earnings of industry-leading companies."

Meanwhile, Chinese companies, especially state-owned enterprises, are actively enhancing shareholder returns. The report observes that "since 2024, the repurchase activities of Chinese stocks listed in Hong Kong and ADRs have significantly increased." Additionally, "Chinese companies have also increased dividend payments, reflecting improvements in governance and financial conditions."

Liquidity Shift: Household Asset Allocation Resetting Towards Equity Assets

Support from macro policies and changes in domestic liquidity provide further support for the market. JP Morgan expects that proactive fiscal and monetary policies will continue.

Moreover, a more noteworthy long-term trend is the flow of domestic funds. The report points out that there are early signs of a shift in Chinese household asset allocation from cash and deposits to equity assets.

The report states, "In the third quarter of 2025, we observed for the first time in four years a shift in fund flows, with retail participation in stocks and inflows into mutual funds rebounding." The report's charts show that cash and deposits account for a very high proportion of Chinese household balance sheets, indicating significant potential for future shifts to the stock market Overall, JPMorgan Chase believes that with the combined effects of policy support, profit recovery, and liquidity improvement, the Chinese stock market is expected to see a dual boost in profits and valuations by 2026.

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