The Numbers Don't Lie

The iShares MSCI China ETF (MCHI) is up 32.8% in 2025, according to Morningstar data as of August 27, 2025. The S&P 500 ETF (SPY) returned 10.7% over the same stretch. The iShares MSCI All-Country World Index ETF (ACWI) came in at 14.6%.

China outperformed global markets, a result that has received limited coverage in mainstream U.S. financial media.

The CSI 300 — the index tracking the largest stocks in Shanghai and Shenzhen — is up more than 4.5% this year, according to CNBC. Hong Kong's Hang Seng is flat. The divergence reflects where investor demand is concentrated: mainland A shares, specifically in semiconductors and hard tech, rather than the consumer or healthcare sectors Western analysts traditionally favored.

What's Actually Driving This

It started with DeepSeek. The Chinese AI model, optimized for efficiency rather than raw compute power, dropped in January 2025 and rattled U.S. tech markets while simultaneously triggering a re-rating of Chinese internet and tech stocks, according to KraneShares. The model demonstrated that China could build world-class AI without unlimited access to Nvidia chips.

The development shifted how investors priced Chinese tech.

"AI is the cleanest and most obvious theme right now," said Leonid Mironov, portfolio manager at Gavekal, speaking to CNBC. His newly approved China fund holds more than half its assets in semiconductors, AI-related manufacturing, and Chinese self-sufficiency plays. Consumer and healthcare account for just 6% of the portfolio.

MorganStanley went overweight on Chinese AI model companies Zhipu and MiniMax, both listed in Hong Kong, as well as Alibaba and Shanghai-listed chip company Cambricon — setting a price target of 2,000 yuan ($294) on Cambricon, according to CNBC.

The Geopolitical Chess Match

CMC Markets outlined the 2025 timeline: Washington started the year by tightening advanced semiconductor export restrictions. Nvidia revised its China-specific product lines — again — offering pared-down accelerators designed to stay inside U.S. export thresholds. Beijing responded by accelerating domestic chip procurement and mandating that state institutions favor local suppliers.

In December, Beijing placed domestically produced AI chips on an official government procurement list for the first time, according to CMC Markets. That created a direct demand channel for companies like Huawei and Cambricon, transforming state-backed purchasing from policy talking point into real earnings catalyst.

China also imposed its own export controls on critical materials used in chipmaking and battery production, signaling that supply chain leverage runs both directions.

The Underlying Economy

The stock gains mask economic weakness across broader sectors. April's retail sales data came in at the weakest since the COVID-19 pandemic ended, according to CNBC. July retail sales growth was slow, factory output slumped, and fixed-asset investment dropped, according to Morningstar. Yardeni Research noted directly that China's 5% GDP growth target "is looking like a reach."

"The AI ecosystem companies, their earnings are doing well, [but it's] not big enough to support the whole Chinese macro environment," said Liqian Ren, director of modern alpha at WisdomTree. "It's really, really uneven."

A handful of semiconductor and AI names are carrying the entire China equity narrative. Consumer China is not participating in the rally.

Aaron Costello, head of Asia investment strategy at Cambridge Associates, told CNBC: "We really can't call it 'tech-leading' anymore. It has become even more narrow, into semiconductors, hard tech, software, hyperscalers."

What Smart Money Is Actually Doing

Mironov holds Tencent and Alibaba as his largest positions alongside hardware names like Shanghai-listed Anji Microelectronics. He's waiting on the sidelines for pure AI model plays like Zhipu and MiniMax until he sees sustainable business models and real customer loyalty — a more disciplined stance than Morgan Stanley's aggressive overweights.

Morningstar's screen of wide-moat, undervalued Chinese stocks listed on U.S. exchanges as of August 27, 2025 identified five names: JD.com (JD), Yum China (YUMC), Baidu (BIDU), Tencent Holdings (TCEHY), and Alibaba (BABA). JD.com's price-to-fair-value sits at 0.53 — meaning Morningstar analyst Chelsey Tam thinks it's trading at roughly half its fair value.

Looking ahead into 2026, KraneShares expected China's 15th Five-Year Plan — due in Q1 of that year — to push harder on high-tech development and domestic demand. A potential reset in U.S.-China diplomatic relations was also anticipated to reduce equity market volatility and clarify the export control environment.

What This Means for You

If you've been avoiding Chinese equities because U.S. financial media framed them as uninvestable, you missed a 32.8% year. The trade tensions remain real, the economy is weak, and valuations on some names are stretched.

The Western media framing of China tech as a basket case has been factually wrong for two years running. KraneShares noted directly that many investors remain unaware of Chinese stocks' strong performance "due, in part, to Western media bias."

The investors making money are buying specific names with specific earnings, staying selective, and not pretending the macro picture is stronger than it is.