Can China Stocks Rise While US Stocks Fall?
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For the longest time, U.S. stocks have led the global markets, and no group has felt this more acutely than China stock investors since 2021, as China stocks have severely underperformed U.S. stocks.
But that’s changing—at least in 2025 so far, the tide has turned. The MSCI China Index has gained 18.7%, while the S&P 500 is down 4.6%.
The key question now: Can this China stock outperformance last?
History has shown that China stocks can surge rapidly, only to experience sharp declines. And with the U.S. stock market still the global leader, any major shock in the U.S. is likely to ripple across world markets, including China.
These are valid concerns. However, we’ve identified several positive factors that could support continued outperformance for China stocks—and here’s why the rally may not be over just yet.
#1 Historically, It Has Happened Before
Many investors may not realize this, but U.S. stocks have experienced "lost decades" before, where the S&P 500 delivered near-zero returns over a 10-year period. There have been bull runs where China stocks outperformed U.S. stocks significantly.
The last major instance was during the 2000 dot-com bust, which was soon followed by the 2008 financial crisis. Between this window, the S&P 500 returned just 23%, while the MSCI Hong Kong surged 97%—more than four times the returns!
We use MSCI Hong Kong instead of MSCI China because the MSCI China Index had yet to be introduced at the time. However, Hong Kong-listed Chinese companies largely reflected China’s economic growth and investor sentiment back then.
The key takeaway: There is historical precedent for China stocks outperforming U.S. stocks over multiple years, even if such a scenario feels unthinkable today.
#2 What Were the Conditions for China’s 2000-2007 Outperformance?
History doesn’t repeat, but it rhymes. By understanding what drove China’s stock outperformance from 2000 to 2007, we can assess whether similar conditions exist today.
What Happened in 2000-2007?
U.S. Stock Market Struggled
The dot-com crash (2000-2002) wiped out trillions in market value.
The 9/11 terrorist attacks (2001) further damaged market confidence.
U.S. stocks took years to recover, creating a weak investment environment.
China’s Initial Setback, Then Rapid Growth
WTO accession (2001) accelerated China’s integration into global trade.
The SARS outbreak (2002-2003) hit China, Hong Kong, and Southeast Asia hard, but China stimulated aggressively, pouring money into infrastructure and industrial expansion.
2003-2007: GDP grew at 10-12% annually, driving foreign capital inflows and fueling a stock market boom.
The BRICs investment thesis (Brazil, Russia, India, China) attracted global funds, further boosting China stocks.
Are We Seeing Similar Conditions Today?
✅ U.S. Overvaluation & Market Fatigue
U.S. tech stocks have led for years, but valuations are now stretched.
Unlike the 2000 dot-com bubble, today’s tech giants generate real revenue and profits—but even they are now facing selling pressure.
The recent correction in major U.S. tech stocks suggests a potential trend reversal.
✅ China’s Economic Growth Is Slower, But Still Outpacing the U.S.
Unlike the 2000s, China is no longer growing at double-digit rates.
However, China’s 5% GDP growth is still higher than the U.S., and it remains the second-largest economy.
Meanwhile, the U.S. economy is expected to contract in Q1, increasing concerns about a slowdown.
The setup isn’t exactly the same as 2000-2007, but we see signs of a mean reversion effect:
U.S. stocks cooling off after years of outperformance.
China’s stock market regaining momentum as valuations recover and policy support increases.
If history is any guide, such shifts can persist for years, meaning China stocks may still have room to run.
#3 China Stocks Remain Undervalued Compared to Other Markets
One of the strongest arguments for China stocks is valuation—they simply aren’t expensive.
After years of underperformance, China stocks only started a meaningful recovery in late 2024. Meanwhile, U.S. stocks, despite their recent correction, remain far from cheap when considering their massive gains over the past decade.
Comparing Valuations (as of Jan 31, 2025):
U.S. stocks (S&P 500) trade at a PE ratio of 21.9x, well above the 25-year average of 16x.
China stocks (MSCI China) trade at a PE ratio of 10.1x, lower than their 25-year average of 11x.
Relative to global markets, China stocks remain among the cheapest.
Growth vs. Valuation Gap
China’s economy is still growing faster than most developed nations, despite lower growth than in the past.
China is already the world’s second-largest economy, and its stock market valuations don’t reflect its economic size or potential.
We believe that it is timely for China to do a valuation catch-up.
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#4 China Has Proven Its Tech Prowess
It’s not just about valuation—cheap stocks can stay cheap if there’s no strong reason for a re-rating. One of the biggest reasons U.S. stocks have dominated is because of America’s technological leadership. For decades, no country came close to competing—until China emerged as a true rival.
Recent successes of China’s tech giants expanding into the U.S. and global markets show that China is closing the gap:
TikTok (ByteDance) – Dominating social media, challenging Meta and YouTube.
Xiaohongshu (Little Red Book) – Expanding internationally, and gained popularity after TikTok was banned temporarily in the U.S.
Temu (PDD Holdings) – Beating Amazon in price wars, reshaping global e-commerce.
DeepSeek – AI breakthroughs rivaling OpenAI, showing China’s strength in artificial intelligence.
Beyond private sector success, the Chinese government has also re-embraced its tech industry after years of regulatory crackdowns. From 2021 to 2023, Beijing imposed heavy restrictions on its largest tech companies, wiping out billions in market value and shaking investor confidence. However, the sentiment has changed. The government is now actively promoting domestic innovation, providing support for AI, semiconductors, and advanced manufacturing. With this newfound backing, China’s tech stocks have rebounded, signaling that better times are ahead.
Perhaps the most surprising development has been China’s resilience in semiconductors despite U.S. sanctions. The U.S. has imposed strict restrictions on high-end chipmaking equipment and access to advanced semiconductor technology, intending to slow down China’s progress. However, China has defied expectations. Huawei’s Mate 60 Pro, powered by a 7nm chip from SMIC, shocked the world, proving that China’s chip industry is far more advanced than previously thought. Furthermore, Huawei has teased the development of an EUV lithography machine, which, if successful, could challenge ASML’s dominance in advanced chipmaking technology.
These developments suggest that China is advancing much faster than expected. If China continues to demonstrate its ability to compete in AI, semiconductors, and e-commerce, the global investment community will eventually take notice. A country that is at the forefront of innovation does not deserve to trade at deeply discounted valuations.
#5 Geopolitics, De-Dollarization, and Fund Flows
Geopolitical tensions are intensifying by the day, with wars, trade tariffs, and rising protectionism shaping the global landscape. A major reason the U.S. continues to dictate global affairs is the dominance of the U.S. dollar. The dollar’s position as the world’s reserve currency allows the U.S. to sanction countries, freeze foreign assets, print money without consequence, and run massive deficits. This financial supremacy effectively gives the U.S. an economic weapon to force compliance from other nations.
For decades, no single country has been able to challenge this dominance—not even the European Union with the introduction of the euro. However, China has been actively reducing its reliance on the U.S. dollar, having been the largest holder of U.S. Treasuries in the past. Over the years, China has significantly sold down its U.S. bond holdings, shifting its foreign reserves into gold, alternative currencies, and other assets to minimize its exposure to the dollar-based financial system.
Additionally, there is a growing movement toward settling global trade in non-USD currencies. China and Brazil, India and Russia, and other BRICS nations have started bypassing the dollar in trade settlements, aiming to build a new financial order that reduces their dependence on U.S. monetary policies. The BRICS bloc is exploring new non-USD trade agreements, signaling a broader push to challenge the dollar’s stranglehold on global finance.
That said, de-dollarization is a long-term process, and breaking the USD’s dominance will not happen overnight. The U.S. still holds tremendous control over global fund flows, particularly through its financial markets, institutions, and asset managers. In China’s stock markets—especially Hong Kong—the direction of fund flows is one of the most critical factors influencing performance. While recent buying in Hong Kong has largely been driven by Mainland Chinese investors, a more sustainable bull run would require increased global fund participation—particularly from U.S. institutional investors.
Encouragingly, Western financial sentiment toward China is shifting. Recently, a Citigroup analyst downgraded U.S. stocks to neutral while upgrading China stocks to overweight, signaling a potential inflection point in investor perception. If more fund managers and financial institutions adopt a pro-China stance, we could see a renewed wave of foreign capital flowing into China’s markets.
Final Thoughts
All in all, we believe that there is a real chance that China stocks could continue to perform well, even if U.S. stocks struggle. Shifting market cycles, valuation re-rating, technological advancements, and changing global fund flows are aligning to China’s advantage.
That said, prudence is key. While China presents a compelling opportunity, one should not go all-in. Diversification remains important, and investors should allocate to China at a level they are comfortable with, balancing both opportunity and risk.
What’s clear, however, is that the China narrative has turned decisively more positive, with brighter prospects in 2025 than at any point in the past five years. If the momentum continues, we may be at the start of a sustained period of China stock outperformance—one that many investors have long stopped believing was possible.