China's stock rally masks economic fragility amid AI and supply chain shifts in 2025

Chinese sharemarkets staged a powerful comeback in 2025, climbing ahead of global peers by the widest margin seen since 2017. Yet the stockmarket rally masks a raft of persistent weaknesses in the real economy that suggest the recovery remains uneven and fragile.

Household sentiment has failed to return to pre-pandemic norms. According to data compiled by TheGlobalEconomy, China’s consumer confidence index was still below its long‑run average through 2025, reflecting ongoing caution among households. Independent reporting by the South China Morning Post noted an earlier slump in confidence to near‑record lows in mid‑2024, tied to falling property and equity values and sluggish wage growth. With roughly 70% of household wealth concentrated in housing, price declines in many second‑ and third‑tier cities such as Chengdu and Dongguan have dented perceived financial security and restrained spending.

Beijing has made boosting consumption a policy priority, but reversing a deep‑seated property correction and restoring household balance‑sheets will take time. In the meantime, export growth remains central to meeting the government’s roughly 5% GDP objective, even as authorities seek to curb excess capacity in some industries under campaigns to reduce internal competition. Officials and state media have signalled a clearer tilt toward growth‑supportive policies in 2025, including targeted fiscal measures and monetary loosening, which have helped revive risk appetite and rerate parts of the market.

Investors, however, should be selective. Earnings momentum is concentrated in certain segments, most notably technology and other “new economy” sectors. Industry observers point to tangible AI‑related monetisation across China’s major internet platforms: Alibaba has rolled generative AI into Taobao to refine product discovery and personalised recommendations and has expanded an AI marketing tool that automates bidding and targeting; Tencent has applied AI to enhance gaming and advertising offerings; and Baidu has integrated AI into search and autonomous driving services. Independent coverage summarising these developments emphasises that companies showing clear paths to revenue and profitability from AI are drawing investor interest.

The surge in AI demand is also reshaping the wider semiconductor supply chain across developed Asia. Memory‑chip suppliers in South Korea have benefited from a sharp tightening of supply and a pronounced lift in prices, with industry reporting indicating significant price moves in late 2025. Samsung and SK Hynix, as leading memory producers, have become crucial suppliers for high‑bandwidth memory used in AI accelerators, prompting high‑level commercial negotiations between US cloud and chip makers and Korean executives. Taiwan Semiconductor Manufacturing Company remains central as the world’s leading foundry for AI accelerator chips, reporting strong year‑on‑year earnings growth and upward revisions to capital expenditure guidance in late‑2025, consistent with robust demand for high‑performance computing wafers.

Geopolitical and trade developments are reframing supply‑chain dynamics. According to company reports and contemporaneous coverage, recent US–Taiwan agreements provide preferential treatment for certain chip exports under tariff provisions while TSMC has outlined very large planned investments in the United States, a move aimed at strengthening supply reliability for American customers even as production capacity across Asia continues to underpin global AI build‑outs.

For portfolio construction, these forces argue for a diversified approach to technology exposure rather than a sole focus on US megacaps. While American hyperscalers continue to invest heavily in frontier models and datacentre infrastructure, the commercialisation of AI is occurring across a fragmented ecosystem that includes cloud operators, software platforms, memory and foundry suppliers in East Asia. Industry commentary and market evidence in 2025 show that earnings upgrades are concentrated among firms demonstrating concrete AI revenue streams and those positioned in constrained parts of the hardware stack.

For investors seeking packaged exposure, product issuers point to thematic ETFs that track the largest technology and online retail names across Asia (ex‑Japan). One such fund reported strong returns through the year ended 31 December 2025, reflecting the rerating of technology and consumer internet stocks across the region. Nonetheless, market participants should weigh the disparity between financial‑market performance and the underlying macro picture in China, remain attentive to policy shifts, and favour companies with demonstrable profit realisation from AI and resilient balance‑sheets.