China equity markets and portfolio strategy: Goldman Sachs keeps a constructive China-equity stance despite a weak week, supported by earnings growth, tariff de-escalation potential and selective sector preferences.

Overview

This weekly China equity-market update reviews market performance, policy and trade developments, earnings, valuations, investor positioning and sector strategy. Goldman Sachs remains constructive over a 12-month horizon, while noting uneven near-term market performance and differentiated positioning across onshore and offshore China equities.

Core views

Chinese equities weakened during the week, with MSCI China down 0.8% and CSI300 down 1.5%. Offshore Health Care and the New China style basket outperformed, while Materials and earnings-revision strategies lagged; onshore Real Estate and GARP outperformed. The market backdrop included President Xi’s September 23–25 US state visit, a further round of US-China economic and trade consultations, and agreements described as covering implementation of earlier commitments, reciprocal tariff reductions, trade and investment councils, and an extension of arrangements reached in Kuala Lumpur. The PBOC maintained its monetary-policy stance at its third-quarter MPC meeting while newly proposing stronger financial support for “six networks” infrastructure. Beijing also issued detailed implementation rules for “828 property market policies.” Trade-policy easing is a central transmission channel in the report’s market outlook. The US effective tariff rate on Chinese products is stated at 23%, yet Chinese exporters delivered strong revenue and earnings growth in 1H26 despite elevated tariffs. Goldman Sachs estimates that every 5-percentage-point reduction in US tariffs could raise Chinese-equity earnings by 0.3%. Its VAR analysis further suggests that a one-standard-deviation decline in the global economic policy uncertainty index could increase MSCI China’s 12-month forward P/E by 5% over the following three months, linking lower uncertainty to valuation expansion as well as potential earnings support. The report’s market stance is underpinned by earnings and valuation data. MSCI China and CSI300 trade at 12-month forward P/Es of 10.2x and 12.9x in the weekly summary, while consensus forecasts 2026/27 EPS growth of 17%/18% for MSCI China and 25%/17% for CSI300. Goldman Sachs presents 12-month targets of 85 for MSCI China, 5,500 for CSI300 and 17,800 for MSCI Hong Kong, compared with current levels of 72, 4,439 and 15,906, implying potential upside of 17%, 24% and 12%, respectively. Its own top-down 2026/27 EPS-growth forecasts are 8%/12% for MSCI China, 20%/13% for CSI300 and 10%/7% for MSCI Hong Kong, compared with higher consensus growth in several cases. Real Estate and Health Care saw the largest upward earnings revisions in offshore and onshore markets, respectively. Sector strategy favors Materials, Tech Hardware, Capital Goods, Retailing and Insurance. The report assigns overweight positions to Materials, Tech Hardware, Capital Goods and Retailing, with 2025–27 EPS CAGRs of 45.7%, 35.4%, 28.0% and 25.3%, respectively; it also lists Insurance as overweight. Semiconductors, Autos, Consumer Services, Diversified Financials, Health Care Equipment and Services, Energy, Banks, and Media and Entertainment are market weight. Utilities, Food and Beverage, Telecom Services, Consumer Durables, Transportation and Real Estate are underweight. The sector valuation table shows substantial dispersion: MSCI China Materials trades at 9.8x 2026E P/E with 89.1% 2026E EPS growth, whereas Semiconductors trade at 82.0x with 966.7% expected 2026E EPS growth. Positioning and flows provide a more mixed near-term signal. Hedge-fund gross China allocation was 7.1%, the 84th percentile of the last five years, while net allocation was 7.5%, only the 27th percentile. A shares saw risk-on flows led by short sales rather than long buying; offshore China equities experienced inflows led by short covering. Global active funds’ China allocation edged down to 5.9%, but EM/Asia mandates remained overweight China by 20 basis points and Asia ex-Japan funds were most overweight China, Singapore and Hong Kong. More than 70% of EM/Asia active-fund holdings in Chinese equities remained in China offshore markets, and Internet stocks continued to dominate portfolios. Domestic mutual funds were highly concentrated in IT, with eight of their ten most-owned A shares in the sector. The report’s style and market-structure indicators favor offshore rotation but do not show extreme retail enthusiasm. Goldman Sachs’ A-H rotation model suggests H shares are likely to modestly outperform A shares over the next three months. Its policy proxy indicates that policy toward private-owned enterprises is in a slightly restrictive zone, while the revised A-share retail-sentiment proxy is not stretched relative to earlier periods of strong sentiment. Insurance institutions eligible to trade Stock Connect stocks were permitted to invest in Stock Connect ETFs from September 20, and cumulative southbound flows reached US$56 billion year to date.

Analysis framework

The report combines weekly index and sector returns with policy and trade developments, bottom-up consensus earnings and valuation data, proprietary barometers, fund-positioning data, Stock Connect flows and style-factor monitors. It then applies these inputs to index targets, sector allocation preferences and the expected relative performance of H shares versus A shares.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Forward P/E and PEG-based relative valuation

  The report compares 12-month forward P/E, P/B and PEG measures across Chinese indices and sectors to relate expected earnings growth to current valuations.

• Quantitative, Factor, and Portfolio TheoryStyle factor analysis

  Style and factor performance monitoring

  The report tracks styles such as GARP, value, growth, balance-sheet strength, dividend yield, momentum and earnings revisions to identify relative performance in offshore and onshore China equities.

• Other

  VAR analysis of global economic-policy uncertainty and MSCI China valuation

  Goldman Sachs uses a vector autoregression estimate to assess how a reduction in policy uncertainty could affect MSCI China’s forward P/E over the following three months.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MSCI China

  Primary offshore China equity-market benchmark used for market targets, earnings, valuation and strategy analysis.

  Strengths

  Consensus EPS growth is 17% for 2026E and 18% for 2027E; Goldman Sachs estimates tariff reductions and lower policy uncertainty could support earnings and valuation.

  Weaknesses

  The index fell 0.8% during the week, while global active-fund China allocation declined modestly.

  Comparison

  Goldman Sachs expects H shares to modestly outperform A shares over the next three months.

• CSI300

  Primary onshore China equity-market benchmark used for market targets, earnings, valuation and strategy analysis.

  Strengths

  Consensus EPS growth is 25% for 2026E and 17% for 2027E; Goldman Sachs sets a 12-month target of 5,500.

  Weaknesses

  The index fell 1.5% during the week.

  Comparison

  The report expects relative outperformance by H shares versus A shares over the next three months.

Key data

• Weekly index performanceMSCI China -0.8%; CSI300 -1.5%Weekly decline
• US effective tariff rate on Chinese products23%Current rate cited in the report
• Earnings sensitivity to tariff reductions+0.3%Estimated Chinese-equity earnings boost for each 5-percentage-point reduction in US tariffs
• Policy-uncertainty valuation sensitivity+5%Estimated increase in MSCI China 12-month forward P/E over three months from a one-standard-deviation decline in global policy uncertainty
• MSCI China consensus EPS growth17% in 2026E; 18% in 2027EI/B/E/S consensus
• CSI300 consensus EPS growth25% in 2026E; 17% in 2027EI/B/E/S consensus
• Index targetsMSCI China 85; CSI300 5,500; MSCI Hong Kong 17,80012-month targets
• Hedge-fund China gross allocation7.1%84th percentile over five years
• Global active-fund China allocation5.9%Declined modestly
• Southbound flowsUS$56 billionYear to date

Impact & implications

Goldman Sachs links a more favorable trade and policy-uncertainty environment to potential earnings support and valuation expansion for Chinese equities. Its strategy expresses this view through positive 12-month index targets, overweight allocations to Materials, Tech Hardware, Capital Goods, Retailing and Insurance, and a three-month preference for H shares over A shares.