East Capital China

In Q3 2025, the macro environment showed modest improvements, marked by reduced external uncertainties and rising domestic policy expectations. The completion of the second round of China-US trade talks eased tariff-related concerns, while the Federal Reserve’s September rate cut reinforced expectations for global monetary easing. Domestically, the introduction of “anti-involution” policies lifted inflation expectations and improved overall macro sentiment. Together, these factors boosted market risk appetite, driving a surge in equity markets, fuelled by strong inflows of leveraged capital. Cyclical sectors and domestic substitution technology stocks both benefitted, with major indices climbing steadily.

The MSCI China All-Shares Index increased 20.5% in USD terms, while our China fund returned 18.5%, reflecting a underperformance of 2.0% alpha. Throughout the quarter, we maintained an active portfolio allocation of 65%, underscoring our conviction in high-quality, selective holdings. Our strategy continued to emphasise alpha generation through sector rotation, bottom-up stock selection, and early positioning in underappreciated growth drivers, including the ongoing re-rating of China’s biotech and innovation sectors.

China’s policy agenda remains focused on stimulating domestic demand and improving market efficiency. The National Development and Reform Commission (NDRC) and the State Administration for Market Regulation (SAMR) released a draft amendment to the Price Law, clarifying standards for unfair pricing and curbing “involution-style” competition. The State Council announced approximately RMB 90 billion in childcare subsidies and RMB 300 billion in ultra-long special treasury bonds to support the “old-for-new” consumption upgrade programme, double last year’s allocation. Additional measures to broaden consumption support, relax restrictions, and enhance the national vacation system aim to further strengthen domestic spending.

Globally, external risks have moderated following the conclusion of key trade negotiations. By late July, the United States reached agreements with Japan, the EU, and South Korea, setting benchmark tariff rates at around 15%. Meanwhile, China and the U.S. completed a second round of trade talks in Sweden, agreeing to extend the current tariff buffer period. The Federal Reserve resumed rate cuts in September, lowering rates by 25 basis points and signalling a dovish outlook. Nearly half of Fed officials now anticipate a total of 75 basis points in cuts for 2025, implying two to three additional reductions may occur in the fourth quarter.

The Fed’s easing cycle and a weaker U.S. dollar have accelerated capital inflows into Asian markets, positioning China as a key beneficiary. Both active and passive foreign funds recorded strong net inflows in late August, with passive funds showing particularly robust momentum. In September, net foreign inflows into Chinese equities reached USD 4.6 billion—the highest level in nearly 11 months—with passive funds alone contributing USD 5.2 billion. These trends reflect renewed global investor confidence in China’s equity market.

Among our holdings, Jiangsu Hengrui Pharmaceutical delivered a standout performance. Its share price rose 67% during the quarter, contributing 106 basis points to alpha. Hengrui, a leading domestic pharmaceutical company, develops drugs across oncology, anaesthesia, and contrast agents. The company continues to leverage flexible global partnerships and a deep pipeline in oncology, and metabolic and cardiovascular diseases, to drive sustainable growth and margin expansion.

Healthcare was the largest contributor to portfolio performance. China’s healthcare market is poised for long-term structural growth, projected to expand from USD 1.4 trillion in 2024 to USD 2.1 trillion by 2030, driven by an ageing population, with those aged 65 and above expected to reach 27% of the populace by 2040. Policy reforms such as volume-based procurement (VBP) and diagnosis-related payment systems are improving efficiency in the Basic Medical Insurance system while channelling resources toward innovation. Meanwhile, the out-of-pocket healthcare market continues to grow, supported by rising incomes and increasing health awareness. Chinese biotech firms are also attracting greater interest and partnerships from multinational pharmaceutical companies, underscoring global confidence in their innovation capability, cost efficiency, and strong clinical pipelines.

Looking ahead, key factors to monitor include US monetary and trade policies, China’s domestic policy direction, corporate earnings, and geopolitical developments. The pace of Fed rate cuts and US dollar movements will influence global capital flows, while uncertainties around US-China trade relations may affect market sentiment and earnings expectations. Domestically, upcoming policy meetings in late October could provide further signals on fiscal, monetary, and anti-involution measures, shaping expectations for economic recovery and liquidity. Fourth-quarter earnings, particularly in the internet and technology sectors, will also be crucial in determining market performance. Geopolitical tensions remain a potential risk, as any escalation could weigh on investor confidence and trigger capital outflows from emerging markets.

Overall, Chinese equities remain under-owned globally, leaving ample room for sentiment to improve on the back of positive catalysts. Valuations remain attractive, and the fundamentals of many companies are intact. A combination of targeted stimulus, improving trade diversification, and modest investor expectations suggests that the fourth quarter of 2025 could see renewed market momentum. Our portfolio remains focused on high-conviction, fundamentally strong names aligned with long-term growth themes, including advanced manufacturing, consumer upgrading, and healthcare innovation.