Navigating China's Deflationary Crossroads: Where to Find Value in Policy-Driven Markets

China's economy faces a deflationary headwind, but policymakers are deploying a mix of monetary easing and structural reforms to steer growth. For investors, the challenge lies in identifying sectors where regulatory tailwinds and liquidity injections can offset broader economic pressures. Here's how to position portfolios for resilience—and upside—in this shifting landscape.

The Deflationary Dilemma: A Policy Response Playbook

China's central bank, the PBOC, has unleashed a battery of tools to combat slowing prices and weak demand. In Q3 2025, it cut the seven-day reverse repo rate to 1.4% and reduced the reserve requirement ratio (RRR) by 50 basis points, injecting ¥1 trillion into the financial system. These moves, paired with targeted measures like mortgage rate reductions for first-time homebuyers (now 2.6%), aim to revive credit growth and consumer spending.

The PBOC's innovative facilities—such as the Securities, Fund, and Insurance Swap Facility (SFISF) and share-buyback loans—have further stabilized capital markets. By late 2025, these tools had injected ¥60 billion into listed companies, boosting liquidity and asset prices. .

Sector Spotlight: Where to Bet on Structural Winners

1. Consumption Upgrades in “Other Services” and Education/Culture

Deflationary pressures are pushing households toward higher-value, necessity-driven spending. The PBOC's focus on stabilizing markets and boosting liquidity has already lifted the CSI 300 Index by 20% since mid-2025. Investors should prioritize sectors like healthcare, education, and tech-enabled services, which cater to rising demand for quality experiences.

• Healthcare: Aging demographics and policy support for elderly care infrastructure (backed by the PBOC's ¥500 billion relending tool) make this a long-term growth pocket.
• Education/Culture: Post-pandemic rebound in travel, entertainment, and lifelong learning could benefit companies offering digital education platforms or cultural tourism.

2. Quality Industrials and Tech Innovation

The PBOC's push to boost tech financing and industrial upgrades is reshaping China's manufacturing sector. Companies in robotics, green energy, and industrial automation stand to gain from ¥800 billion in refinancing quotas aimed at supporting innovation.

• Green Energy: Look for firms involved in battery tech, renewable infrastructure, or carbon-neutral solutions, as policy shifts drive demand.
• Automation: Firms with exposure to smart manufacturing and AI-driven industrial tools could capture productivity gains.

3. Consumer Staples: A Defensive Play

Lower interest rates and targeted mortgage relief are easing household budgets, potentially boosting demand for staples like food, beverages, and household goods. Companies with strong pricing power and exposure to rural markets (a focus of the PBOC's ¥300 billion SME support package) are well-positioned.

Beware the Tariff Crosshairs: Caution on Export-Heavy Sectors

While domestic-focused sectors thrive, investors must avoid overexposure to industries reliant on U.S. exports. Tariffs on tech hardware, textiles, and machinery remain a drag, with limited relief in sight. The RMB's stabilization near ¥7.20/USD eases currency risks but does little to offset trade barriers.

Investment Strategy: Target Quality, Avoid Tariff Risk

• Buy:
• Tech/Industrial: Companies like Huawei (HWT.UL) in 5G infrastructure or Tongfang Energy in green tech.
• Consumer Staples: Nestle China (00085.HK) or domestic brands with rural distribution networks.

• Healthcare: China Resources Pharmaceutical (01116.HK) for its elderly care exposure.

• Avoid:

• Export-heavy firms like Foxconn (2317.TW) or textiles producers facing U.S. tariffs.

Conclusion: Align with Policy, Look Beyond Headlines

China's deflationary challenges are real, but the PBOC's aggressive easing and structural reforms are creating pockets of opportunity. Investors who focus on consumption upgrades, tech-driven industrials, and quality staples—and avoid tariff-exposed sectors—can navigate these waters profitably. While risks like weak credit demand linger, the playbook is clear: follow the liquidity, not the headlines.