The team at Vanguard have released an updated outlook on Australian and global equities.
In its Investment and Economic Outlook report, the investment firm provided commentary on Australia, USA, Mexico, Japan, UK, Canada, Europe, and China.
Chinese equities have been an emerging story for global investors thanks to the country's AI development and exposure.
China is a global leader in semiconductor production, but it isn't limiting its AI participation to this segment.
Last month, I covered that Chinese companies engaged in battery manufacturing and Graphics Processing Units (GPUs) have been benefiting from the Chinese AI boom.
However, a new report from Vanguard has provided a more modest outlook on Chinese equities moving forward.
AI to drive near-term growth, but upside is limited
In yesterday's report from Vanguard, the ETF provider said China's AI development appears faster but less impactful than that of the US.
According to the report, China's front-loaded strategy is driven by a strong digital ecosystem, robust energy infrastructure, greater acceptance of AI, aggressive government funding, and a vast talent pool in science, technology, engineering, and mathematics.
Vanguard said these factors imply near-term upside risk, but it sees more limited upside potential for capital deepening and productivity gains.
Efficient models and strong infrastructure reduce the need for heavy investment, and China's labour market is significantly less exposed to potential AI automation because jobs are far more concentrated in agriculture, manufacturing, and construction than in the US.
Commenting on this outlook, Grant Feng, Vanguard Senior Economist, said:
Faster AI adoption in China will boost real growth in the near term, but the upside potential is limited for future capital deepening and productivity gains. Structural headwinds are strong, and AI alone won't be enough to lift the economy.
The report said Vanguard expects GDP growth to ease modestly to 4.5% in 2026, with tariff drags partly offset by a rebound in manufacturing and infrastructure investment.
How can Aussie investors get exposure to Chinese equities?
For Aussie investors more bullish on the Chinese market, there are a few pure-play thematic ETFs to consider.
The first is the iShares China Large-Cap AUD ETF (ASX: IZZ).
As the name suggests, it is designed to measure the performance of 50 of the largest and most liquid Chinese companies that trade on the Hong Kong Stock Exchange.
It has risen roughly 13.8% in the last year.
Investors more focused on Chinese tech exposure might consider the Global X China Tech ETF (ASX: DRGN).
It offers access to 20 leading Chinese technology companies listed in Hong Kong and Mainland across 15 core sectors, including semiconductors, robotics, software, and internet platforms.
It has risen more than 20% in the last year.
Finally, VanEck China New Economy ETF (ASX: CNEW) offers exposure to roughly 120 Chinese companies with growth prospects in sectors that make up 'the New Economy'.
These are sectors such as technology, health care, consumer staples, and consumer discretionary.
It has risen 14% in the last 12 months.
