China equity portfolio strategy amid policy and macro developments: Goldman Sachs favors China A shares as policy and macro risks return to focus

Overview

This portfolio-strategy report reassesses Chinese equities as investor attention shifts from AI momentum toward global rates, oil, RMB moves, domestic policy and US-China political events. Goldman Sachs argues that China’s relatively insulated macro and rate backdrop, alongside earnings and valuation support, favors diversification into A shares and selective alpha themes rather than a concentrated AI-hard-tech position.

Core views

Goldman Sachs says global and China equity attention had been dominated by AI for most of 2026, but has recently shifted toward policy and macro issues amid renewed Middle East tensions, higher global bond yields, Fed policy, China developments and a busy late-September political calendar. It reiterates a diversification bias away from concentrated AI Hard Tech exposure and highlights A shares, domestic AI relative to AI exporters, non-AI opportunities, Shareholder Returns and IPO strategy as preferred alpha-generating ideas in what it describes as a muted-beta market. On energy, oil had risen above US$100/bbl after trading around US$80/bbl in recent months. Although Persian Gulf disruptions remained in place, Goldman Sachs’ commodity strategists estimated that daily flows through the Strait of Hormuz and from Gulf countries were roughly 40% and two-thirds, respectively, of pre-war levels. This supports their expectation that Brent settles near US$85/bbl by year-end even if tensions extend into 2027. The report argues China has been comparatively resilient to the oil shock because of geographic and fuel-source diversification, sizable reserves, fiscal offsets and refining capacity; Chinese equities also show lower return beta to oil than global peers. The report sees global bond yields as elevated by inflation, fiscal-sustainability concerns and potential AI-capex crowding out. Following firmer-than-expected August CPI/PCE data, Goldman Sachs economists added a 25bp September FOMC rate hike to their base case. While tighter global financial conditions typically weigh on Asian equities, the report argues the pace of real-rate increases matters more than the level. With the US neutral rate potentially trending toward 3%, medium-term growth and inflation expected to improve, shorter offshore-China equity duration and below-fair valuations, a September hike should not be a major roadblock for Chinese equities. China’s 10-year government yield, at 1.7%, remained an outlier near all-time lows; Goldman Sachs interprets this as leaving A-share equity risk premium toward the high end of its recent-year range and supporting China as a diversification destination. Its top-down model indicates an equilibrium forward P/E of roughly 12x, using nominal GDP growth, China and US rates, China aggregate financing, global activity, S&P 500 P/E and USDCNY as inputs. For the RMB, the report notes appreciation of 4.1% against the US dollar and 3.6% on a trade-weighted basis year to date. Its FX strategy team expects USDCNY to fall to 6.4 from 6.7 over the next 12 months, supported by Chinese exports, which rose 14.6% year-on-year in the first eight months, and by policy emphasis on RMB internationalization. A stronger RMB can create translation and transaction losses for exporters, but Goldman Sachs argues potential market-share gains, product and geographic diversification and value-added upgrading should more than offset the headwind; Chinese exporters’ profits grew 80% year-on-year in 1H26. It retains a structural Going Global view, while distinguishing companies that benefit from or are adversely affected by RMB strength. On domestic policy, Goldman Sachs says phasing out China’s longstanding property pre-sale model could lengthen developers’ cash-conversion cycles, accelerate consolidation and pressure local-government finances, while supporting banks’ asset quality. It believes the US$54bn recapitalization of banks and insurers should add financial buffers and growth impetus, contributing to the rerating of some bank equities. Conversely, increased capital-outflow intensity and tax-policy concerns relating to Announcement #21 could weaken near-term sentiment for Chinese-capital-linked overseas assets, particularly Hong Kong developers and insurers, Macau gaming firms and offshore-listed Chinese private enterprises with dividends potentially in scope for taxation. Regarding a possible September 24 Trump-Xi meeting, the report says market participants hoped for greater clarity on bilateral trade and investment, AI regulation and cybersecurity, and geopolitics, but had low conviction in major breakthroughs. Across 19 prior episodes since 2017, offshore Chinese equities generally traded sideways or in a narrow range before meetings or calls, then gained an average 2% and 4% over the following one and three months. Still, with the report’s US-China Relations Barometer indicating moderate implied tensions, Goldman Sachs believes any near-term upside is more likely to come from other macro and company-level catalysts than from the potential meeting itself. The report finds similarities with the September 2024 policy pivot—slowing growth, weak domestic demand and housing stress—but judges the case for another large-scale stimulus package less urgent. Corporate profit growth was at its fastest pace in 2Q26 since 2021, exports and trade surplus were surging, and CSI 300 was 42% above its September 2024 local trough. Compared with September 2024, current 12-month forward P/E was 10.2x versus 8.4x, US 10-year yields were 5.0% versus 3.7%, China 10-year yields were 1.7% versus 2.1%, and export growth was 25.0% versus 8.6%. However, Goldman Sachs economists still believe faster government issuance, execution of planned investment projects and support for consumption and social safety nets will be needed to meet the roughly 4.5% 2026 GDP-growth target. AI remains central to earnings despite slower price velocity after the broad July selloff. Chinese AI companies grew profits 40% year-on-year in 1H26, compared with 7% for non-AI companies, and AI-related profits represented 23% of aggregate earnings in China’s listed universe. Investors remained comfortable holding first-half winners on fundamental grounds, while onshore mutual funds and margin financing were still concentrated in AI Hard Tech. Goldman Sachs therefore favors a domestic-China-AI exposure, linked to technological self-sufficiency, hedged by Chinese AI exporters; domestic AI firms had outperformed AI exporters since June. The report also identifies offshore internet as a way to access AI-application exposure with less positioning concentration, but says investors are reluctant to pay for AI-upside optionality until platforms restore core-business profitability, return cash flow to positive territory or show a clear monetization roadmap. In a high-rate environment, earnings growth is seen as the key differentiator, leading Goldman Sachs to prefer China A shares on Overweight versus offshore H shares on Marketweight. For investors using swaps to access A shares, it says risk/reward is strengthened by CSI 300 and CSI 1000 funding spreads at historical highs. Finally, Goldman Sachs argues that AI’s dominance has obscured a broad non-AI alpha opportunity set. The Shareholder Returns theme has been a quiet outperformer, particularly on a Sharpe-ratio basis, supported by record dividends, share-cancelling buybacks and strong Southbound flows since 2Q. Healthcare and materials have drawn client interest for adjacent AI exposure with lower beta to the AI trade. The Hong Kong/China IPO market—more than 200 new companies and US$77bn raised year to date—is another source of idiosyncratic-return opportunities, although the report says tactical IPO participation should focus on characteristics associated with positive post-listing returns.

Analysis framework

Goldman Sachs moves from global macro shocks and China’s relative resilience to rate, currency and policy transmission, then compares current conditions with the 2024 policy pivot. It combines top-down valuation and equity-risk-premium analysis with historical event studies, earnings comparisons, positioning observations, thematic performance and screens for potentially affected offshore-listed Chinese private enterprises.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Top-down equilibrium forward P/E analysis

  The report estimates that China equities should trade at an equilibrium forward P/E of around 12x, using macro and market inputs to frame valuation.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Oil-shock and RMB transmission through China’s economy and exporters

  The report traces how energy diversification, refining capacity, fiscal offsets, currency translation effects and exporters’ upgrading may shape equity outcomes.

• Event-Driven and Behavioral FinanceEvent-driven analysis

  Historical analysis of Trump-Xi meetings and calls

  The report compares offshore-equity performance before and after 19 prior bilateral-leadership episodes to contextualize the potential September meeting.

• Quantitative, Factor, and Portfolio TheorySharpe and Information Ratios

  Sharpe-ratio comparison of the Shareholder Returns theme

  The report identifies Shareholder Returns as a quiet outperformer particularly on a risk-adjusted-return basis.

Asset mapping & comparison

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

• China A shares

  Preferred China-equity exposure; rated Overweight relative to offshore H shares.

  Strengths

  Elevated equity risk premium, low onshore rates, strong earnings differentiation and potentially attractive swap funding spreads.

  Comparison

  Preferred over offshore H shares, which are rated Marketweight.

  Risks

  Global financial tightening, weaker domestic demand and insufficient policy support.

• Offshore H shares

  China-equity exposure rated Marketweight.

  Strengths

  Shorter equity duration and pricing viewed as below fair value.

  Weaknesses

  Less favored than A shares because earnings growth is the key return differentiator in a high-rate environment.

  Comparison

  Rated Marketweight versus Overweight for A shares.

  Risks

  Capital-outflow and Announcement #21 tax concerns may dampen sentiment for certain Chinese-capital-linked overseas assets.

• Chinese domestic AI firms

  Preferred domestic AI exposure linked to China’s technology self-sufficiency objective.

  Strengths

  Outperformed AI exporters since June; AI-company profits grew 40% year-on-year in 1H26.

  Weaknesses

  Positioning remains concentrated in AI Hard Tech.

  Comparison

  Preferred alongside a hedge through Chinese AI exporters.

  Risks

  Slower AI-stock price velocity and concentration risk.

• Chinese AI exporters

  Hedge to domestic AI exposure and potentially differentiated by RMB sensitivity.

  Strengths

  Exporters’ profits rose 80% year-on-year in 1H26.

  Weaknesses

  A stronger RMB can create translation and transaction losses.

  Comparison

  Domestic AI firms have outperformed AI exporters since June.

  Risks

  RMB appreciation, tariffs and protectionist measures.

• Shareholder Returns theme

  Non-AI alpha theme supported by dividends and buybacks.

  Strengths

  Outperformed the broader market, particularly on a Sharpe-ratio basis; supported by record dividends, share-cancelling buybacks and Southbound inflows.

  Comparison

  Presented as a quieter outperformer relative to the dominant AI trade.

Key data

• Brent oil forecastAround US$85/bbl by year-endGoldman Sachs commodity strategists’ view despite possible tensions extending into 2027.
• China 10-year government bond yield1.7%Hovering near all-time lows and supporting an elevated A-share equity risk premium.
• USDCNY forecast6.4Expected over the next 12 months, versus 6.7 currently.
• Chinese export growth14.6% year-on-yearGrowth in the first eight months of 2026 supporting the RMB view.
• Chinese exporter profit growth80% year-on-yearGrowth in 1H26 cited as an offset to RMB headwinds.
• Bank and insurer recapitalizationUS$54bnExpected to strengthen financial buffers and growth impetus.
• China GDP growth targetAround 4.5%The report says further fiscal support is still required to achieve the 2026 target.
• Chinese AI-company profit growth40% year-on-year1H26 growth, versus 7% for non-AI names.
• AI-related share of China listed-universe earnings23%Shows AI’s growing importance to the aggregate earnings pool.
• Hong Kong/China IPO activityMore than 200 companies and US$77bnYear-to-date new listings and aggregate funds raised.

Impact & implications

The report’s central portfolio implication is to diversify beyond concentrated AI Hard Tech while retaining selective AI exposure. It favors A shares for earnings, valuation and equity-risk-premium support, differentiates RMB beneficiaries from companies exposed to currency headwinds, and identifies shareholder returns, healthcare, materials and selected IPO opportunities as potential sources of idiosyncratic returns.

Risks

• A faster tightening of global financial conditions could pressure Asian and Chinese equities.
• Oil-price volatility and prolonged Middle East tensions remain macro risks.
• RMB appreciation may hurt exporters through translation and transaction losses.
• Tariffs and protectionist measures could create sporadic risks for the structural Going Global theme.
• Announcement #21-related taxation and capital-outflow concerns could weigh on selected overseas Chinese assets.
• The report sees low conviction that a Trump-Xi meeting would deliver major breakthroughs.
• Property-policy changes could lengthen developers’ cash-conversion cycles and pressure local-government finances.
• AI Hard Tech positioning remains concentrated, increasing diversification risk.

What to watch

• Whether Brent oil prices settle near the report’s US$85/bbl year-end expectation.
• The September FOMC decision and the pace of real-rate increases.
• USDCNY progress toward the 6.4 12-month forecast and the effect on exporters.
• Fiscal issuance, investment-project execution and consumption or social-safety-net support needed for the roughly 4.5% 2026 GDP target.
• Developments around the potential September 24 Trump-Xi meeting, especially trade, investment, AI regulation, cybersecurity and geopolitics.
• Profitability, cash-flow recovery and AI-monetization roadmaps at offshore internet platforms.
• Positioning in AI Hard Tech and the durability of dividends, buybacks, Southbound inflows and IPO-market conditions.