China equity strategy: anti-involution, destocking and trade-relation uncertainty Report Interpretation

Overview

JPMorgan’s China equity strategy contrasts sectors making tangible progress in reducing excess capacity with export-oriented businesses facing a more difficult trade backdrop. It retains an Overweight China-equity allocation but advocates selectivity and flags near-term macro, liquidity and seasonal headwinds.

Core views

The report frames China’s anti-involution campaign through quarterly changes in capital expenditure, inventory days, revenue and net profit margins. Its preferred near-term areas are logistics, chemicals and battery materials because they show the desired combination of rising capex, destocking, revenue growth and margin recovery. Chemicals, coal, battery materials and livestock entered the “capex up + destocking” quadrant in 2Q26. Coal and livestock are expanding vertically to improve cash-flow stability, while chemicals and battery-material companies are pursuing technology upgrades to lower production costs. Logistics is presented as the earliest and clearest example of the transition. It entered the capex-up and destocking quadrant in 3Q25 and the capex-up and restocking quadrant in 1Q26, aided by policy-guided price coordination and capacity upgrades. The report cites freight-price floors and self-discipline rules across 22 provinces. STO Express reported approximately Rmb1bn of 1H26 net profit, up 128.3% year on year, while its 2Q26 profit rose 165% year on year; JPMorgan identifies J&T as its logistics top pick. Chemicals and refining have benefited from geopolitical disruption alongside supply-demand repair, which widened refined-product and petrochemical spreads. Rongsheng Petrochemical reported Rmb5.1bn of first-half profit, up 749%, and overseas revenue of Rmb21.8bn, up 45%. Wanhua Chemical reported Rmb10.1bn of net profit, up 64%, with overseas revenue of Rmb57bn, up 35%; Baofeng’s net profit was Rmb9.7bn, up 70%. The sector screen also shows battery-material revenue growth accelerating to 97% year on year in 2Q26, chemicals returning to 12%, and coal reaching 37%. In contrast, autos, liquor and solar remain in the “capex down + restocking” quadrant. Domestic auto competition is intense, with average profit per vehicle around Rmb3,000. Automakers are seeking overseas demand, with Chery deriving 69% of 1H26 sales overseas and BYD’s overseas revenue exceeding domestic revenue for the first time, but this increases exposure to trade friction. Liquor inventory days were still up 23% year on year, although slower than the 35-45% range in 2025. Solar remains the most stressed: industry supply exceeds demand by more than two to one, average utilization is below 40%, and 22 listed companies together lost more than Rmb10.5bn in 1Q26. The external risk is a rising wave of trade measures across Europe, South America and Southeast Asia, including anti-dumping duties, anti-circumvention rulings, licensing requirements, EV tariffs and carbon-border measures. The report expects European policy to focus on sector-specific safeguards and more anti-subsidy and anti-dumping investigations in EVs, solar hardware and batteries. This uncertainty can constrain Chinese companies’ overseas expansion and pressure P/E multiples. Overseas revenue exposure reached 18% for MXCN in 1H26 and 22% for the CSI-300; information technology had particularly high MXCN overseas exposure at 56%. JPMorgan sees low expectations for the September 24 Trump-Xi summit as cushioning downside. The baseline expectation is limited trade and AI-governance dialogue rather than a broad agreement, and the report argues that no tangible new commitments would create limited disappointment because expectations are already muted. Another leaders’ meeting planned for the November 18-19 APEC forum is viewed as a stabilizing factor, absent inflammatory statements or abrupt tariff escalation. JPMorgan maintains an Overweight allocation to China equities within EM/Asia and end-2026 targets of 100 for MXCN and 5,200 for the CSI-300, supported by consensus EPS-growth projections of 14% and 25%, respectively. It nevertheless identifies several near-term cautions: potentially tighter monetary policy and liquidity, a worsening Asia QMI cycle indicator, risk aversion ahead of US mid-term elections, limited earnings catalysts before October’s 3Q reports, and unfavorable seasonality. AI remains a tier-one growth theme after outperforming the broader China equity market in 2Q26, although liquidity turbulence could make a second-half rebound uneven. Favored AI supply-chain names are Iluvatar CoreX, V-Test, JCET, AMEC and NAURA; non-AI picks include Meituan, Bank of China-H, Bank of Ningbo, CICC-H, Innovent, BYD-H and China Resources Land.

Analysis framework

JPMorgan combines a sector screen of capex growth and inventory-day changes with revenue and net-margin trends to identify where anti-involution is improving industry economics. It then compares sector operating evidence, export exposure and recent trade measures, and overlays macro liquidity, earnings and event risks on its China-equity allocation view.

Methodology notes

• Industry AnalysisSupply-demand framework

  Sector assessment using capex, inventories, capacity utilization, revenue and margins

  The report uses investment and inventory movements as indicators of supply discipline and demand conditions, then checks whether revenue and profitability are recovering.

• Industry AnalysisVolume-price decomposition

  Price coordination and margin recovery in logistics

  The report links higher shipping-price floors and industry self-discipline to improved logistics earnings and profits.

Asset mapping & comparison

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

• J&T Express - H (1519.HK)

  JPMorgan’s top logistics pick in a sector benefiting from pricing coordination and earnings recovery.

  Strengths

  Logistics is identified as the anti-involution leader.

  Risks

  Oil-price support and the durability of price coordination affect the sector transition.

• Iluvatar CoreX - H (9903.HK), V-Test - A (688372.SH), JCET - A (600584.SH), AMEC - A (688012.SH), NAURA - A (002371.SZ)

  Favored domestic AI supply-chain players.

  Strengths

  AI remained a tier-one growth theme and outperformed the broad China equity market on financials in 2Q26.

  Risks

  Liquidity turbulence could make the expected 2H26 rebound choppy.

• Meituan (3690.HK), Bank of China - H (3988.HK), Bank of Ningbo - A (002142.SZ), CICC - H (3908.HK), Innovent (1801.HK), BYD - H (1211.HK), China Resources Land (1109.HK)

  JPMorgan’s non-AI diversification picks.

  Strengths

  Offered as diversification outside the domestic AI supply chain.

Key data

• MXCN end-2026 target100Maintained base-case target supported by 14% consensus year-on-year EPS growth.
• CSI-300 end-2026 target5,200Maintained base-case target supported by 25% consensus year-on-year EPS growth.
• STO Express 1H26 net profitcRmb1bnUp 128.3% year on year; 2Q26 profit rose 165% year on year.
• Rongsheng Petrochemical first-half profitRmb5.1bnUp 749% year on year; overseas revenue was Rmb21.8bn, up 45%.
• Solar supply-demand ratioMore than 2:1Average utilization was below 40%; 22 listed firms lost over Rmb10.5bn combined in 1Q26.
• MXCN overseas revenue exposure18% in 1H26Up from 15% in 2024 and 17% in 2025.

Impact & implications

The report argues that sector selection should favor industries where supply discipline is translating into inventory reduction and profit recovery, while exporters and sectors with persistent overcapacity remain more vulnerable to trade barriers, price competition and valuation pressure. Its broader China-equity Overweight view is tempered by near-term liquidity, macro and seasonal risks.

Risks

• New sector-specific trade safeguards, anti-dumping or anti-subsidy probes could pressure Chinese exporters’ overseas expansion and P/E multiples.
• Tighter monetary policy and liquidity, a worsening Asia QMI indicator, weak seasonality and limited earnings catalysts could weigh on equities in the coming weeks.
• Unexpected inflammatory statements or abrupt tariff escalation could materially worsen US-China relations.
• Autos, liquor and solar remain exposed to intense competition, restocking and weak capacity utilization.

What to watch

• The September 24 Trump-Xi summit and whether it produces trade or AI-governance commitments beyond muted expectations.
• EU progress toward its October trade-rebalancing deadline and potential investigations affecting EVs, solar hardware and batteries.
• October 3Q earnings reports for evidence that revenue and margin recovery is broadening.
• Whether logistics, chemicals and battery materials sustain capex increases, destocking and profitability improvement.
• Liquidity conditions and the planned November 18-19 APEC leaders’ meeting.