China's Stock Market Rebound: A Strategic Buy-Point Amid Easing Trade Tensions?

Market Sentiment Recovery: A Tenuous Truce in Trade Tensions

China's stock market has experienced a dramatic rebound in late 2025, driven by a fragile but notable easing of U.S.-China trade tensions. According to a New York Times report, the CSI 300 Index surged in early October 2025 after U.S. President Trump's conciliatory remarks and Beijing's clarification of its rare earth export policies signaled a potential de-escalation. This shift in rhetoric bolstered investor confidence, with global markets, including U.S. tech stocks, rebounding sharply, per a Wedbush note. However, the market remains vulnerable to renewed friction, as evidenced by Washington's proposed 100% tariffs on Chinese imports and Beijing's retaliatory measures, which triggered a sharp correction in mid-October, as the New York Times reported.

The Hang Seng Index, representing Hong Kong's market, fell 2.04% on October 13, 2025, underscoring the sensitivity of Chinese equities to geopolitical risks, according to a China Studies report. Despite this volatility, analysts note that the current rally reflects a pricing-in of a "best-case scenario" where trade tensions stabilize, even as underlying risks persist, as reported by the New York Times.

Policy-Driven Growth: Fiscal Stimulus and Sectoral Tailwinds

China's 2025 fiscal stimulus package has been a cornerstone of its economic strategy, with the government raising the fiscal deficit to 4% of GDP and allocating ¥1.3 trillion in ultra-long-term special treasury bonds to fund high-tech industries, infrastructure, and consumer demand initiatives, according to reporting in major outlets. These measures, detailed in a China Studies report, target sectors such as artificial intelligence, advanced manufacturing, and green energy, aiming to drive innovation-led growth.

Key policy tools include trade-in programs for consumer goods (e.g., cars, home appliances) and subsidies for digital products like smartphones and tablets; these initiatives have supported retail sales and mitigated the impact of U.S. tariffs, per the China Studies report. Additionally, ¥1.2 trillion in science and technology funding underscores Beijing's commitment to self-reliance in critical technologies.

The impact of these policies is already visible in industrial output: equipment manufacturing grew 10.2% year-on-year in the first half of 2025, while high-tech manufacturing expanded 9.5%, according to a Yicai Global report. This aligns with the National Development and Reform Commission's emphasis on "industrial modernization" through low-cost financing and R&D incentives, as noted by Yicai Global.

Valuation Metrics: Fair but With Room for Caution

As of October 2025, the China Shanghai Composite Index trades at a P/E ratio of 16.00, according to MacroMicro, slightly above its 5-year average of 14.34 per the China Studies report. While this suggests the market is neither overvalued nor undervalued, the MSCI China Index remains 34% below its 2021 peak, trading at a 10.04% year-to-date gain. This discount, combined with a 39% YTD rally, reflects a mix of optimism and lingering caution among investors, as noted in a CNBC article.

Institutional sentiment has turned cautiously bullish, with Southbound Stock Connect flows and ETF inflows surging 50% year-on-year, per Yicai Global. Sectors like power equipment and machinery have attracted significant institutional attention, as seen in October 2025 research activity on firms like Rongbai Technology, according to the Yuantrends map. However, analysts warn that overbought conditions could reverse if trade tensions escalate, as highlighted in the CNBC article.

Strategic Buy-Point Analysis: Balancing Opportunity and Risk

The current environment presents a nuanced case for strategic entry into Chinese equities. On the positive side:
- Policy tailwinds: Fiscal stimulus and sector-specific support (e.g., AI, renewables) create a favorable backdrop for long-term growth.
- Valuation appeal: The MSCI China Index's 34% discount to its 2021 peak suggests potential for re-rating if trade tensions ease further.
- Institutional confidence: Increased research activity and ETF inflows indicate a shift toward selective optimism.

However, risks remain:
- Trade volatility: U.S. threats of 100% tariffs and rare earth export controls could reignite market jitters, as reported by the New York Times.
- Structural challenges: Weak consumer sentiment and property sector woes persist despite stimulus, according to Yicai Global.

A prudent approach would involve dollar-cost averaging into undervalued sectors (e.g., high-dividend utilities, tech) while hedging against geopolitical shocks. Defensive plays in healthcare and telecommunications may offer stability, while cyclical sectors like machinery could benefit from policy-driven demand, as noted by Yicai Global.

Conclusion: A Calculated Bet on Resilience

China's stock market rebound in late 2025 reflects a delicate balance between policy-driven optimism and geopolitical uncertainty. While fiscal stimulus and trade tension de-escalation have created a near-term tailwind, investors must remain vigilant about the fragility of this recovery. For those with a medium-term horizon, strategic entry into sectors aligned with Beijing's growth agenda-particularly AI, green energy, and consumer durables-could offer compelling risk-adjusted returns. However, the path forward will require continuous monitoring of trade developments and policy execution.