China's Resurging Equity Market: Sector Rotation and High-Conviction Opportunities in 2025

China’s equity market is undergoing a pivotal shift in 2025, driven by divergent performances in its manufacturing and non-manufacturing sectors. While the manufacturing PMI remains in contraction territory at 49.4 in August 2025, the non-manufacturing PMI has edged above the 50-growth threshold at 50.5, signaling a structural realignment in the economy [1][2]. This sector rotation presents both challenges and opportunities for investors, particularly in high-growth areas like AI, renewable energy, and advanced services.

Divergent Sector Dynamics

The manufacturing sector has faced five consecutive months of contraction, with deflationary pressures and declining profits exacerbating its struggles [1]. However, production activity has stabilized, expanding for the fourth month in a row, and business expectations have surged to 53.7, hinting at cautious optimism [3]. In contrast, the non-manufacturing sector—encompassing services and construction—has shown resilience. A temporary trade truce with the U.S. and domestic stimulus measures have boosted construction activity to 52.8 in June 2025, while services remain a steady growth engine [2].

This divergence reflects broader economic trends: manufacturing is grappling with global demand volatility and U.S. tariff pressures, while non-manufacturing sectors benefit from policy-driven digitalization and infrastructure spending [4]. For investors, this creates a clear imperative to rotate capital toward sectors with stronger growth trajectories.

High-Conviction Stocks in the New Economy

The non-manufacturing sector’s strength is underpinned by structural shifts in AI, healthcare, and renewable energy. Chengdu Jiafaantai (SZSE:300559), an EdTech leader, exemplifies this trend. Its AI-powered learning platforms have driven a 14.2% annual revenue CAGR, despite a challenging 2024 [1]. Similarly, Telink Semiconductor (SHSE:688591) is capitalizing on IoT and 5G demand, leveraging government incentives under the “Made in China 2025” initiative to expand its R&D-driven business model [1].

In renewable energy, Chenming Electronic Tech (TWSE:3013) has surged 31.1% in 2024, fueled by AI and 5G-driven demand for PCB systems [1]. Meanwhile, Eoptolink is addressing China’s AI infrastructure needs with 800G and 1.6T transceivers, enabling more efficient GPU clusters [5]. The healthcare sector also offers compelling opportunities, as seen with Sunshine Guojian Pharmaceutical, which secured a landmark licensing deal with Pfizer after advancing its TL1A antibody technology [5].

Strategic ETF Exposure and Risk Mitigation

For diversified exposure, ETFs like the KraneShares CSI China Internet ETF (KWEB) and iShares MSCI China ETF (MCHI) provide access to large-cap internet and broader equity growth [4]. These vehicles hedge against individual stock volatility while capturing the non-manufacturing sector’s upward momentum. However, investors must remain vigilant about geopolitical risks, particularly in tech and finance, where regulatory shifts could disrupt valuations [6].

Conclusion

China’s equity market is at an inflection point, with sector rotation favoring non-manufacturing industries. While manufacturing faces headwinds, the non-manufacturing sector’s growth in AI, healthcare, and renewables offers a compelling case for long-term investment. By targeting high-conviction stocks and leveraging ETFs, investors can navigate macroeconomic uncertainties while capitalizing on the country’s innovation-driven recovery.

Source:
[1] China manufacturing activity shrinks for fifth straight month ..., [https://www.reuters.com/markets/asia/china-manufacturing-activity-shrinks-fifth-straight-month-august-2025-08-31/]
[2] China Non Manufacturing PMI, [https://tradingeconomics.com/china/non-manufacturing-pmi]
[3] China's manufacturing poised for renewal, [http://en.ce.cn/Insight/202509/t20250901_2460958.shtml]
[4] What are the best Chinese ETFs to invest in? [https://hellostake.com/au/blog/trending/what-are-best-chinese-etfs-to-invest-in]
[5] Inside the rise of star stocks in China's new economy [https://www.vaneck.com.au/blog/china/star-stocks-china-new-economy/]
[6] Top Investment Sectors in China for 2025 [https://www.linkedin.com/pulse/top-investment-sectors-china-2025-lester-davila-escobedo-w5cwf]