Market Update: GDP Growth Stabilises; Structural Highlights Focus on AI and High-End Manufacturing

• Growth Stabilises: Domestic GDP rose 4.6% YoY in the first three quarters. Q3 GDP expanded 4.5% YoY (vs. 4.4% market consensus, up 0.2 ppt from Q2) and grew 1.2% QoQ.

• Supply Stronger than Demand: Industrial value-added above designated size rose 5.3% and exports (in RMB) surged 16.4%. Conversely, fixed asset investment (FAI) fell 7.2%, real estate development investment declined 20.6%, and retail sales rose only 1.1%.

•  Structural Highlights in New Drivers: High-tech manufacturing output jumped 14.3%; information transmission, software, and IT services output rose 10.4%; information services investment surged 20.2%; and retail sales of telecom equipment gained 18.1%.

• Correction Driven by Multiple & Sentiment: Overseas rate hikes, heightened scrutiny over AI CapEx ROI, and shifting memory supply expectations led to a marked global semiconductor pullback, despite resilient underlying earnings and industrial data.

• Allocation Takeaway: AI remains the sector with the most concentrated verifiable momentum. Pullbacks reflect sentiment and valuation reset rather than earnings impairment. Broad-based index funds offer a more resilient approach than single-stock picking.

Data Overview: Growth Stabilises as Structural Divergence Persists

According to preliminary estimates by the National Bureau of Statistics (NBS), China’s Gross Domestic Product reached RMB 107.1071 trillion in the first three quarters, up 4.6% YoY at constant prices. By quarter, GDP expanded 5.0% in Q1, 4.3% in Q2, and 4.5% in Q3, with Q3 QoQ growth at 1.2%. The 0.2 percentage point acceleration in Q3 compared to Q2 effectively halted the softening trend observed in the first half of the year. By industry, the primary, secondary, and tertiary sectors grew by 3.7%, 3.8%, and 5.2% respectively, with the services sector continuing to serve as the chief driver.

Relative to market expectations, Q3 GDP YoY and QoQ growth both slightly exceeded forecasts (4.4% and 1.1%, respectively). September retail sales surpassed consensus, industrial output was in line, and exports significantly beat expectations, as summarized in the table below:

Indicator	Period	Actual	Market Consensus	Comments
GDP (YoY)	Q3	0.045	0.044	Slightly beat expectations; rebounded 0.2 ppt from Q2
GDP (YoY)	Jan–Sep	0.046	—	Within the full-year target range of 4.5%–5%
Industrial Value-Added (Above Designated Size)	Sep	0.055	0.055	In line with expectations; fastest pace in six months
Total Retail Sales of Consumer Goods	Sep	0.011	0.006	Above expectations, partly due to a low base in prior year
Fixed Asset Investment (excl. rural households)	Jan–Sep	-0.072	—	Unchanged from Jan–Aug
Real Estate Development Investment	Jan–Sep	-0.206	—	Pace of decline widened from Jan–Aug
Exports (in USD terms)	Sep	0.363	0.255	Substantially beat expectations
Consumer Price Index (CPI)	Sep	0.009	0.01	Slightly below expectations; core CPI stood at 1.0%
Producer Price Index (PPI)	Sep	0.05	0.045	Above expectations; upstream prices accelerated
Sources: National Bureau of Statistics (NBS), General Administration of Customs, iFinD, compiled by iFAST Research; consensus data from Reuters survey medians. Note: Cumulative growth rates for retail sales (+1.1%) and CPI (+0.9%) across Jan–Sep coincide with individual September prints; figures verified with official NBS data. Cut-off: Sep 2026.

The official assessment underscores that “the issue of insufficient domestic demand remains relatively prominent.” Despite Q3 growth slightly beating forecasts, we view this stance as fully justified given the specific components driving outperformance. The upside was almost entirely generated by industrial output and external trade. On the domestic demand side, while September retail sales exceeded consensus, this was partially attributable to a low prior-year base; auto sales dropped 21.2% YoY, and the contraction in fixed asset investment failed to narrow. In essence, the rebound lifted overall volume without remedying underlying structural weakness.

For investors, this carries two clear implications:

• Diminished Urgency for Broad Stimulus: The third-quarter beat reduces the pressure for aggressive macro easing. Investors should avoid betting on an indiscriminate, policy-driven market rally.
•  Priced on Independent Earnings Drivers: In an environment where domestic demand lacks organic recovery, market pricing will continue to center on sectors with independent profit drivers—namely the AI and advanced hardware supply chain.

Upside vs. Downside: Supply Stronger than Demand

The Upside — Manufacturing and External Demand: During the first three quarters, value-added industrial output above designated size (enterprises with annual primary revenues of RMB 20M+) rose 5.3%, quickening to 5.5% in September. Goods exports rose 16.4%, surging 29.6% YoY in RMB terms in September (36.3% in USD terms). Mechanical and electrical products grew 23.7%, representing 64.3% of total exports. The trade surplus hit USD 133.53 billion in September, lifting the Jan–Sep total to USD 938.1 billion—on track to eclipse the 2025 record of ~USD 1.19 trillion. The EU trade surplus widened markedly, adding ~USD 57 billion YoY over Jan–Sep (more than double the incremental gain with the US). In producer pricing, September PPI rose 5.0% YoY (+1.2 ppt vs. August), and purchasing prices climbed 6.9% YoY, indicating rapid upstream cost pass-through.

Investment Implication: A meaningful portion of incremental export growth stems directly from AI hardware demand. Global compute CapEx fuels exports of chips and electronic components, directly boosting top lines for domestic semiconductor and electronic manufacturers. As long as global AI spending does not materially decelerate, these earnings do not rely on a recovery in Chinese consumer demand.

The Downside — Investment and Household Demand: Jan–Sep fixed asset investment contracted 7.2%, matching Jan–Aug levels. Real estate development investment sank 20.6%, with sales area and sales value of newly built commercial housing declining 13.2% and 13.9%, respectively. Infrastructure investment slipped 4.2%, manufacturing investment dropped 2.1%, and private investment tumbled 10.4%. On the consumer front, total retail sales expanded by just 1.1%, with goods retail rising only 1.0%. Mild inflation figures—with core CPI at 1.0% in September—corroborate sluggish consumer sentiment.

Two marginal improvements warrant attention: online secondary housing registrations grew 10.7% YoY (a rare bright spot in real estate), and per-capita disposable income rose 4.4% in real terms alongside a decline in urban surveyed unemployment to 5.2%. While foundational, these improvements have yet to spark a meaningful recovery in private expenditure.

Portfolio Impact Across Vehicles: Sluggish domestic demand impacts our key focus products unevenly:

• iShares Hang Seng TECH ETF: Most sensitive. Heavy platform weighting means e-commerce, local lifestyle services, and digital advertising revenues directly correlate with household spending.
• T. Rowe Price Funds SICAV - China Evolution Equity: Moderately sensitive. Overweighted in industrials and information technology, but top 10 holdings feature select domestic plays like hotels and online recruitment platforms.
• GF CSI All Share Information Technology Index ETF: Least sensitive. Holdings are concentrated in semiconductor equipment, materials, and hardware driven by enterprise CapEx and exports. Prior to confirmed consumption recovery, portfolio weighting should tilt toward this low-sensitivity asset.

Structural Highlights: New Drivers in AI and Advanced Manufacturing

Beneath top-line metrics, structural momentum is concentrated in advanced industries. Equipment manufacturing and high-tech manufacturing output grew 10.2% and 14.3% YoY in Jan–Sep, outperforming overall industrial production by 4.9 and 9.0 percentage points, respectively. Outputs of 3D printing equipment (+62.5%), lithium-ion batteries (+39.5%), and industrial robots (+29.1%) surged. In services, the information transmission, software, and IT services industry rose 10.4%, with its September production index rising 9.8%.

New Growth Driver Indicator	Jan–Sep YoY Growth	Comparison to Broad Benchmark
High-Tech Manufacturing Value-Added	14.30%	Industrial Output above designated size: +5.3%
Equipment Manufacturing Value-Added	10.20%	Industrial Output above designated size: +5.3%
Info Transmission, Software & IT Services Value-Added	10.40%	Services Sector: +5.2%
Information Services Investment	20.20%	Fixed Asset Investment: -7.2%
Electronic & Telecom Equipment Mfg Investment	7.60%	Manufacturing Investment: -2.1%
Intellectual Property Products Investment	9.30%	Fixed Asset Investment: -7.2%
Telecom Equipment Retail Sales (Above Designated Size)	18.10%	Retail Goods Sales: +1.0%
Sources: National Bureau of Statistics (NBS), iFinD, compiled by iFAST Research. Data as of September 2026.

The divergence in capital expenditure reinforces this trend: despite total FAI falling 7.2%, investment in intellectual property products (R&D, software, databases) rose 9.3%, and information services investment surged 20.2%. Similarly, telecom retail sales climbed 18.1% vs. 1.0% overall retail goods, reflecting AI device upgrade cycles and higher average selling prices. These highlights align seamlessly with the constituents of the GF CSI All Share Information Technology ETF, whose underlying index maintains nearly 100% tech exposure across semiconductor fabrication, equipment, domestic processors, and server infrastructure.

AI Investment Opportunities: Recent Pullback Leaves Long-Term Thesis Intact

Despite robust fundamental data, market sentiment has diverged since early October. By October 16, the Philadelphia Semiconductor Index (SOX) logged eight consecutive down days—its longest losing streak since 2008. Domestic tech growth shares retreated after the Golden Week holiday, with memory chips and advanced packaging experiencing pronounced corrections.

The pullback stems from three primary factors:

• Macro Tightening: The Federal Reserve resumed interest rate hikes in September amid firm inflation, keeping long-end yields elevated and compressing growth equity multiples.
• CapEx Scrutiny & Debt Pressures: Investors questioned whether AI infrastructure spending would translate into timely revenues. Select AI cloud providers reliant on high-yield debt encountered balance sheet strain, shifting market anxiety from valuation toward credit and financing risk.
• Supply Fears & Profit Taking: Technological strides by domestic memory makers sparked worries over potential supply gluts and price wars. Following sharp H1 gains, institutional profit-taking amplified the correction.

Addressing Supply Doubts — ChangXin Technology Earnings Validation:

ChangXin Technology's disclosed 1H 2026 results show revenue of RMB 150.31 billion (+873.6% YoY) and net profit attributable to parent shareholders of RMB 77.61 billion, substantially beating pre-listing guidance. Management attributed the surge to insatiable global compute demand, structural DRAM shortages, and sharply higher contract pricing. Domestic capacity is entering a supply-deficit market rather than causing a price glut. Even if higher supply eventually cools pricing, it will lower system build costs and accelerate downstream adoption, benefiting the broader AI ecosystem.
Note: Subsidiary ChangXin Memory Technologies (CXMT) is on the US Entity List and DoD 1260H List (June 2026 update). Data is cited strictly to reflect sub-sector supply/demand fundamentals and does not constitute an investment endorsement.

These headwinds adjust multiples and sentiment rather than the earnings trajectory. Key new-driver metrics in official GDP data continue to record double-digit expansion. In Q1, the CSI All Share Information Technology Index delivered 20% revenue growth and 74% earnings growth; we forecast full-year 2026 EPS growth of approximately 70% (subject to Q3 reporting). Electronics sector profits surged 1.1x YoY in Jan–Aug.

Memory market fundamentals remain solid: TrendForce forecasted in early October that Q4 conventional DRAM contract prices will climb 10%–15% QoQ (15%–20% including HBM), with NAND flash up 15%–20%. The world’s largest memory chipmaker posted preliminary Q3 operating profit of ~KRW 107.4 trillion (+782.5% YoY). Even factoring in planned fab expansions, our models project a high-single-digit DRAM supply shortfall in 2026, widening into 2027.

On policy, nine ministries released guidelines on October 19 supporting an 'AI + Manufacturing' framework to boost smart devices and robotics, expanding AI demand from upstream compute buildout toward edge adoption. On fiscal support, the RMB 800 billion in new policy financial tools deployed this month (+60% vs. 2025's RMB 500B, ~0.6% of GDP) explicitly includes digital and AI infrastructure alongside traditional works.

We reaffirm our Overweight rating and 3.5-Star ('Attractive') stance on China equities in our Q4 outlook. Within a K-shaped economy, AI and semiconductors serve as structural engines while traditional segments adjust. The recent pullback is a multiple and positioning rebalancing, not a reversal of structural trends.

Focus Vehicles & Asset Allocation Framework

The following three focus vehicles capture key high-growth segments identified in the GDP data: hardware & semiconductors, software platforms, and intelligent equipment manufacturing.

Focus Vehicle	Ticker	Market / Domicile	Benchmark Index	Supporting Data
GF CSI All Share Information Technology Index ETF	159939.SZ	Shenzhen Stock Exchange	CSI All Share IT Index	High-Tech Mfg: +14.3%
iShares Hang Seng TECH ETF	3067.HK	Hong Kong Stock Exchange	Hang Seng TECH Index	IT Services: +10.4%
T. Rowe Price Funds SICAV - China Evolution Equity	LU2187417386	Luxembourg (UCITS)	MSCI China All Shares Index	Equipment Mfg: +10.2%
Sources: Fund managers, index providers, compiled by iFAST Research. LU2187417386 denotes Class A USD shares.

Per the group’s Q4 outlook (data as of September 23, 2026), the CSI All Share IT Index carries an estimated target of 17,224 points based on a 55x fair P/E, implying ~63% upside driven by earnings growth rather than multiple expansion. The Hang Seng TECH Index carries a target of 7,164 points based on a 22.5x fair P/E, implying ~64% upside over a longer horizon. Following recent pullbacks, upside potential expands; if earnings underperform, margins will tighten.

Key Investment Risks

• Global AI CapEx and Financing Environment: Sustained skepticism regarding AI monetization or higher refinancing costs for cloud service providers could lead to downward revisions in tech earnings expectations.
• Elevated Overseas Interest Rates: Persistently higher-for-longer yields from the Federal Reserve would continue to compress multiples across duration-sensitive growth equities.
• Memory Supply and Price Dynamics: Accelerated capacity additions could soften contract pricing; conversely, overly rapid price spikes could dampen downstream consumer hardware replacement.
• Subdued Domestic Consumption Recovery: Should the real estate slump deepen (investment currently down 20.6%), sluggish domestic sentiment may prolong the K-shaped divergence and cap broad market indices.
• Sustainability of Export Momentum: September export strength includes low base effects and potential front-loading. Widening trade surpluses may intensify trade frictions with key trading partners.

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Use of Artificial Intelligence

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