Review of Our Earlier Call: China’s Structural Advantages in Withstanding the Energy Shock

The energy supply shock triggered by the U.S.–Iran conflict is the most severe global energy crisis in modern history. Constraints in the Strait of Hormuz and damage to the Ras Laffan LNG terminal at one point sent Brent crude up by more than 80% from its pre-crisis level. Multiple Asian economies declared energy emergencies in succession, while global inflation expectations rose sharply. Against this backdrop, we put forward a view that clearly differed from market consensus: China’s structural ability to withstand this energy shock was stronger than consensus had reflected. That view was not based on any optimistic assumption about how the war would evolve, but on the systemic energy-security framework that China had already put in place before the conflict.

Diversified Supply Sources: Dependence on Hormuz Has Been Deliberately Reduced

Crude shipped through the Strait of Hormuz now accounts for close to half of China’s total oil imports. That share is the result of a deliberate reduction over the past decade through a more diversified pipeline network and the domestic electrification process. The China–Russia crude oil pipeline, the Central Asia natural gas pipeline network (covering Turkmenistan, Kazakhstan, and Uzbekistan), and more diversified maritime shipping routes together form an effective supplement to Middle Eastern seaborne channels. By comparison, India’s dependence on Middle Eastern crude is about 60%, meaning the direct cost pressure it faced in this shock was clearly greater than China’s.

Energy Mix Advantage: The Transmission of a Single Commodity Shock Is Naturally Diluted

Coal and renewable energy together account for around 70% of China’s total energy consumption. This means that large swings in crude prices are naturally diluted before being transmitted into China’s overall energy cost structure. At the same time, high electric-vehicle penetration continues to reduce both household and industrial exposure to fuel demand, weakening the transmission channel from energy prices to CPI.

Strategic Reserves and Alternative Supply: The Buffer Window Is Relatively Ample

The International Energy Agency estimates China’s strategic petroleum reserves at around 140 million barrels, close to 100 days of crude imports, placing it at a relatively high level among major oil-importing nations. In addition, Russia and Iran continue supplying crude to China through non-USD settlement mechanisms, creating effective supplementary channels outside the Western sanctions framework and further strengthening China’s alternative import security. After the war broke out, Beijing also moved quickly to deploy domestic price-control mechanisms, further containing the pass-through of energy costs to end-consumer prices.

Monetary Policy Space: A Supply-Side Shock Has Instead Opened an Easing Window

This is one of the most underestimated structural divergences in the current energy shock. For the Fed and the ECB, higher energy prices amount to imported inflation, directly constraining monetary policy and forcing them to maintain or even intensify tightening bias. For the People’s Bank of China, the situation is different.

Before the war broke out, China was one of the few major economies still facing deflationary pressure. Higher energy prices have pushed CPI out of deflation, which in fact gives the PBOC room to maintain an accommodative monetary stance without being constrained by inflation. The transmission logic is clear: higher energy prices lift CPI back toward a more normal range, allowing the PBOC to preserve policy continuity on the credit-easing front. Reserve requirement ratio cuts and policy rate cuts have not yet been deployed, meaning meaningful policy reserves remain available.

Q1 Data Confirm the Validity of the Above Judgement

The following data points provide a direct window into how far the energy shock has actually transmitted through the economy. On April 16, 2026, the National Bureau of Statistics released Q1 economic data that were overall better than market expectations, showing faster production momentum, upgraded export structure, investment turning positive, and a mild recovery in consumption. GDP growth of 5.0% year on year not only reached the upper end of the target range set at the Two Sessions, but was also 0.5 percentage points faster than in the previous quarter, indicating that policy support is being transmitted to the real economy in an orderly way.

Indicator	2026 Q1	2025 Q4 / Full Year	Change	Commentary
GDP growth, YoY	+5.0%	+4.5% (Q4)	▲ 0.5ppt	Reached the upper end of the Two Sessions target range; a strong start
Industrial value added above designated size	+6.1%	+5.0% (Q4)	▲ 1.1ppt	Production momentum clearly accelerated
Fixed-asset investment	+1.7%	−3.8% (full-year 2025)	Turned positive	Driven jointly by fiscal and manufacturing investment
Retail sales of consumer goods	+2.4%	+1.7% (Q4)	▲ 0.7ppt	Consumption recovered mildly, with sequential improvement

Source: National Bureau of Statistics, April 16, 2026. The comparison base for fixed-asset investment is full-year 2025 data.

Beyond the core indicators in the table above, several additional data points are worth highlighting. Value added in high-tech manufacturing rose 12.5% year on year, while output of industrial robots, lithium-ion batteries, and 3D-printing equipment increased 33.2%, 40.8%, and 54.0%, respectively. This suggests that new productive forces have moved from policy vision to measurable growth contribution. Total goods imports and exports rose 15.0% year on year, of which exports of mechanical and electrical products grew 18.3%, indicating continued upgrading toward higher value-added export structure; imports rose 19.6%, also signalling a marginal recovery in domestic demand. Infrastructure investment rose 8.9% year on year, and economy-wide fixed-asset investment excluding real estate grew 4.8%, validating the substantive impact of stronger fiscal policy. Core CPI rose 1.2% year on year, leaving ample room for monetary policy operations. The main drag remains property: real-estate development investment fell 11.2% year on year in Q1, while floor space sold for newly built commercial housing fell 10.4%. Even so, the structural drag is narrowing at the margin—the economy’s growth engine is already switching in an orderly way.

Technology: The Core Driver of Medium- to Long-Term Growth

If structural protection against the energy shock explains China’s relative resilience under the current external backdrop, then the technology sector’s systemic policy support and earnings growth path are the more fundamental reasons behind our constructive medium- to long-term view on Chinese equities.

The Two Sessions included “AI+” in the government work report for the first time as a standalone economic concept. Full-industry deployment of AI agents was listed as a clear policy task, alongside explicit support for broad adoption of AI PCs, AI smartphones, and intelligent industrial equipment. The 15th Five-Year Plan sets average annual growth in R&D spending at 7%, raises the digital economy’s share of GDP target to 12.5%, and identifies ultra-large intelligent-computing clusters as a new type of infrastructure.

The layered design of industrial policy is equally noteworthy. Integrated circuits, advanced equipment, and the low-altitude economy are classified as “emerging pillar industries,” focused on nearer-term commercialization; quantum technology, brain–computer interfaces, and 6G are classified as “future industries,” providing long-duration option value. Information technology is the only sector that spans both layers, meaning the policy support horizon extends across the full 15th Five-Year Plan cycle and does not depend on any single short-term policy impulse.

The emergence of DeepSeek has led the global market to recalibrate how large the China–U.S. AI technology gap really is. This is not an isolated event. It reflects the underestimated competitiveness Chinese technology firms have built through model-architecture efficiency and engineering optimization under capital and compute constraints. Intense “involution-style” competition has compressed near-term margins, but it has also accelerated gains in cost efficiency and innovation intensity—capabilities that are now being translated into deployment advantages in AI infrastructure.

From an earnings perspective, the growth path for China’s technology sector has relatively clear structural support. Q1 real growth in high-tech manufacturing reached 12.5%, roughly twice the all-industry average of 6.1%, showing that policy support is translating into measurable earnings growth differentials. In January–February, operating revenue of large-scale service industries rose 7.4% year on year, while the production index for information transmission, software, and IT services rose 11.8%, clearly ahead of the broader service sector.

Looking ahead, consensus expects EPS growth for the CSI All Share Information Technology Index to reach 40%, 25%, and 15% in FY26E, FY27E, and FY28E, respectively. Earnings growth for the Hang Seng Tech Index is expected to accelerate to 13.8% in FY27E. Both growth paths are derived from bottom-up earnings forecasts rather than simply extrapolated macro assumptions.

The Three Pre-War Pillars of the Investment Thesis Remain Intact

After assessing the impact of the energy shock, one point is worth making clearly: China’s investment case was already in place before the war began. The energy crisis has not undermined the fundamentals and, in some respects, has further strengthened China’s relative advantages.

Pillar one: the most proactive fiscal policy stance in history. The Two Sessions set a growth target of 4.5% to 5.0%, while the fiscal deficit ratio stayed at 4% for a second consecutive year at a historical high. General public budget expenditure exceeded RMB 30 trillion for the first time, and ultra-long special sovereign bond issuance rose 30% year on year to RMB 1.3 trillion. Q1 infrastructure investment grew 8.9% year on year, while fixed-asset investment turned positive at +1.7% from -3.8% for full-year 2025, validating real transmission of fiscal policy. More importantly, reserve requirement ratio cuts and policy rate cuts have not yet been used, meaning Beijing’s policy toolkit remains relatively ample.

Pillar two: a ten-year strategic commitment to technology. As discussed above, the 15th Five-Year Plan’s technology policy framework spans both near-term and long-term dimensions, and does not become invalid because of war developments or changes in trade policy. It is a structurally embedded long-term driver anchored at the institutional level.

Pillar three: valuations remain within historical norms. The MSCI China Index currently trades at around 11x forward P/E, slightly below its 10-year historical average of around 11.4x. The last technology-cycle peak was roughly 22x. The recent correction caused by the dual pressures of war and tariffs has not closed the entry window—within a historical valuation framework, current levels still look broadly reasonable.

Forward Outlook: The Window for Monetary Easing Remains Open

At the macro level, there is a possibility of a sequential slowdown in Q2 growth. This risk merits close monitoring, but it remains within the market’s expected framework. In the data, trade composition changed notably in March 2026. Under the combined effects of technology-cycle demand fluctuations, energy-price movements, and potential tariff policy changes, monthly export growth slowed to 2.5%. Looking ahead, the high-level China–U.S. meeting in May will be the key variable shaping the direction of the next phase of trade frictions and macro risk appetite. In the property chain, development investment still fell 11.2% year on year, confirming that the sector’s structural adjustment is not yet fully complete.

That said, if Q2 data do soften, the PBOC still has room to respond proactively with counter-cyclical tools. Reserve requirement ratio cuts and rate cuts have not yet been used, and with inflation remaining moderate, monetary policy can be more flexible than in other major economies in supporting domestic demand and credit conditions. That means any market pullback at that point could represent a relatively reasonable allocation opportunity, rather than simply a signal of worsening fundamentals.

Valuation and Upside Potential: The Allocation Window Remains Open

Although Chinese equities have already posted some gains year to date, current overall valuations still have room to recover toward a more reasonable midpoint. The CSI 300 and MSCI China currently trade at roughly 13.1x and 11.7x FY26E P/E, respectively, suggesting that these assets still retain a foundation for valuation re-rating over a three-year horizon.

Index	Current P/E (FY26E)	FY27E earnings growth	2028 target level	3-year potential upside
CSI 300	~13.1x	EPS growth +12%	CNY 6,285	~36%
MSCI China Index	~11.7x	EPS growth +12%	HKD 97	~24%

Source: Bloomberg Finance L.P.; iFAST estimates, as of March 25, 2026. Target levels are derived from estimated fair P/E multiples for each index and do not constitute a return guarantee.

By 2027, EPS growth for both the CSI 300 and MSCI China is expected to accelerate to 12%. With macro stimulus gradually feeding through and pricing power recovering among sector leaders, the asset class now offers both a valuation cushion and an earnings-acceleration catalyst, creating a twin-engine allocation case of multiple re-rating and earnings growth.

Recommended Allocation: Coordinated Exposure Across A and H Shares

Based on the framework above, we suggest building layered exposure to Chinese equities through the products below. The products are grouped by investment thesis and can be combined flexibly according to an investor’s currency preference, risk tolerance, and account structure.

Category	Product Name	Ticker	Market / Trading Currency
Broad China Exposure — China	E Fund CSI 300 ETF	510300.SH	A-shares / CNY
Broad China Exposure — China	iShares Core MSCI China ETF	HKEX: 2801	Hong Kong / HKD
Broad China Exposure — China	Fidelity China Focus	A-SGD	SGX / SGD
China Technology Exposure — China Tech	GF CSI All Share Information Technology ETF	159939.SZ	A-shares / CNY
China Technology Exposure — China Tech	iShares Hang Seng Tech ETF	HKEX: 3067	Hong Kong / HKD
China Technology Exposure — China Tech	Lion-OCBC Securities Hang Seng Tech ETF	SGX: HST	SGX / SGD

Source: iFAST; Bloomberg Finance L.P., as of March 25, 2026. The products above are for reference only and do not constitute investment advice.

Within the broad China bucket, the three products correspond respectively to an onshore A-share channel (E Fund CSI 300), an offshore Hong Kong channel (2801), and an active-management option (Fidelity China Focus). Within the technology bucket, the three products provide exposure to the full A-share technology chain (159939, covering semiconductors, software, and AI applications), Hong Kong-listed internet and technology platforms (3067), and a Singapore-listed alternative route for Hong Kong technology exposure (HST).

Related Articles

·         Interpreting New Signals from the 2026 Two Sessions: Capturing the Main Investment Themes of the 15th Five-Year Plan

·         China Has Greater Capacity to Absorb the Oil Price Shock; the Current Pullback May Be Overstated

·         iFAST Q2 2026 Investment Outlook: The Middle East Shock Reinforces the Case for Asian Allocation

Risk Disclosure

1.       Trade and geopolitical risks: further escalation in U.S. tariffs, or a broader scope of China–U.S. technology frictions, could put downward pressure on earnings forecasts for export-oriented constituents and temporarily weigh on market risk appetite.

2.       Macro volatility and financial risks: if the domestic property market recovers more slowly than expected, or if progress in resolving local government debt is less smooth, valuation repair in the financial sector could be constrained.