Introduction

As global markets enter 2026, renewed focus has turned to Chinese equities,long shunned by some foreign investors yet periodic strong performers in recent years. This interest is driven by several developments: a resurgence in equity prices in 2025, deep structural reforms in key sectors like technology and AI, and evolving macroeconomic conditions that have reshaped how global investors value China’s stock markets. However, tensions between investors’ optimism and economic realities raise the question: Is the Chinese stock market genuinely undervalued as we move through 2026?

Valuation Benchmarks: Are Chinese Stocks Cheap?

When assessing valuation, common metrics such as price-to-earnings (P/E) and price-to-book (P/B) ratios are pivotal. Historically, Chinese equities have traded at lower multiples than developed markets, partly reflecting cyclical economic weakness and policy uncertainty.

• Broader benchmarks like the MSCI China Index have been trading near ~11x P/E, significantly below U.S. equities,a discount of nearly 47% in historical comparisons.
• Similarly, forward valuations for indices such as the Hong Kong 50 have hovered below long-term averages, suggesting “not expensive” valuations relative to history.
• Comparatively, even after gains in 2025, forward P/E ratios for China A-shares and the Hang Seng are lower than the U.S. S&P 500, underlining ongoing relative valuation gaps.

These metrics imply that Chinese equities are cheaper in nominal valuation terms than many global peers, a traditional sign of undervaluation. However, valuation alone doesn’t tell the full story.

Macro and Structural Headwinds

Valuation discounts often reflect economic concerns, and the Chinese economy still faces notable headwinds:

• Slower economic growth is expected into 2026, with forecasts suggesting deceleration from previous years,a factor that can justify lower equity multiples.
• Persistent deflationary pressures, weak domestic demand, and property market difficulties weigh on corporate earnings and investor sentiment.
• Despite strong trade surpluses, consumption remains subdued, impeding robust corporate profit growth in many sectors.

These fundamental issues can make low valuations appear justified rather than opportunistic. Cheap markets aren’t always undervalued,they can merely reflect economic malaise.

Investor Sentiment and Market Repricing

Investor behavior and policy signals also influence valuation. In 2025, Chinese markets enjoyed rallies led by tech and AI sectors:

• Record IPO activity and strong tech listings in Hong Kong signal renewed capital inflows and confidence.
• Indices like the Shanghai Composite, Shenzhen Composite and ChiNext delivered substantial returns, driven by tech and innovation enthusiasm.

However, some analysts now see Chinese markets entering a consolidation phase with slower upside potential in 2026,mild gains rather than explosive growth. Morgan Stanley’s forecasts point to modest index increases of roughly 3–4% by year end, reflecting limited valuation expansion without stronger earnings progression.

Earnings: The Key to Future Valuation

A pivotal factor in valuation judgment is whether earnings can justify current prices. Recent analysis suggests:

• The rally in 2025 was largely confidence-driven, not earnings-driven. For 2026, stronger earnings growth is necessary to sustain higher valuations.
• Institutional projections show profit growth potentially accelerating, which would bolster valuation support if realized.

Thus, the market’s undervaluation thesis hinges on whether profitability can catch up with current prices, not just historical discount metrics.

Relative Versus Absolute Undervaluation

It’s important to distinguish between relative valuation and absolute undervaluation:

• Relative undervaluation: Chinese equities appear cheap compared to the U.S. and other developed markets, offering diversification and bargain multiples.
• Absolute undervaluation: This requires that current equity prices are below intrinsic value based on future earnings potential. Here, the evidence is mixed,strong in select sectors (e.g., technology, AI), but ambiguous in the broader market.

Individual stocks may indeed be undervalued based on cash-flow or industry outlooks, even if the broad market is fairly priced.

Conclusion: A Nuanced Verdict

Is the Chinese stock market undervalued in 2026? The answer is yes and no:

• Yes, on a relative basis: Compared to global markets, Chinese equities still trade at lower valuations, offering potential value for long-term investors seeking diversification and exposure to fast-growing strategic sectors.
• Not definitively on an absolute basis: Economic headwinds, profit reliance, and consolidation dynamics mean that valuations could be fair rather than deeply undervalued unless earnings accelerate meaningfully.

Bottom Line: The Chinese stock market presents valuation opportunities, but these are contingent on economic recovery, stronger earnings, and clearer policy support. Investors should use bottom-up stock selection and sector-specific analysis, rather than relying on broad market valuation alone, to capitalize on potential undervaluation in 2026.