Thoughts from the Road: China

I recently returned from Asia, including stops in Beijing and Hong Kong, my third visit to the region so far in 2026. Each trip has continued to reinforce our conviction that Asia remains a core focus of KKR’s global investment strategy. Indeed, between the ongoing corporate reform momentum in markets such as Japan and Korea, and the powerful consumption upgrade stories unfolding across India and Southeast Asia, the region continues to benefit from multiple, durable tailwinds. Consistent with this view, we remain actively engaged in Asia both deploying and monetizing across Private Equity, Infrastructure, Real Estate, Capital Solutions, and Credit.

However, it is certainly not business as usual. Recent developments in the Middle East are figuring more prominently in conversations than in the U.S. or Europe. Rising commodity prices and renewed pressure on supply chains are beginning to create more immediate friction across parts of the region, especially in some of the smaller countries in Southeast Asia. As a result, market attention is much more skewed towards energy security and supply chain resilience than concerns such as software disruption and Private Credit. In China, for example, there is definitely less worry about software obsolescence, given that the region largely bypassed the traditional SaaS buildout, and also there is more limited exposure to Private Credit.

EXHIBIT 1: Domestic China Buying of Equities Has Helped to Modestly Cushion Foreign Equity Outflows. We Sense China Wants More Stability Via More Domestic Flows, But We Still Think Foreign Capital Plays an Important Role

China Equities: Domestic Buying vs. Foreign Outflows, 2026 YTD, US$ Billions 

EXHIBIT 2: ‘New Economy’ Sector Growth Is Expected to Drive China GDP Growth in 2026. If There is Good News, it is That Real Estate is Now Less of a Drag

China GDP Breakdown by Sector (2026)

Overall, my meetings with a broad cross-section of policymakers, political officials, corporate leaders, and investors left me with several important conclusions that we believe warrant investor attention. They are as follows:

1. Despite ongoing imbalances and pressure on profits, aggregate GDP growth in China now appears quite steady.

Exports remain solid, fixed investment towards AI is strong, and consumption is positive, albeit unspectacular. At the same time, the drag from the property sector is moderating, with our work suggesting roughly a 100-basis points headwind in 2026 (Exhibit 2), down meaningfully from a peak level of drag (fully 370 basis points) in 2022. Importantly, for those expecting a large, stimulus-driven consumer inflection point, that approach does not appear to be on the agenda. Rather, the government appears focused on ‘fixing’ legacy imbalances, namely housing, local government financing vehicles, and excess capacity, in a more deliberate and controlled manner that does not rely on external capital or in a way that does not create some internal moral hazard conundrum.

2. The country has seen its currency strengthen, a signal of more global interest in owning Renminbi assets, as well as growing confidence among Chinese policymakers that it does not need a ‘cheap’ currency to increase competitiveness.

We think that 4-5% appreciation per annum during the next few years makes sense, a tailwind that should help improve domestic consumers’ buying power. However, over time, we believe the bigger opportunity for China lies in further rebalancing its economy away from just exports and fixed investment to include a broader and deeper offering of services in the economy, particularly as automation accelerates further (which we think will put more pressure on traditional manufacturing job loss; see Exhibit 21). Encouragingly, we are already seeing early signs of this shift. China’s easing of visa restrictions is supporting a pickup in inbound travel. For instance, my hotel this trip was atypically packed with business visitors and tourists from the Middle East and Southeast Asia. As we detail below, we are also in favor of the Chinese government using its current deflationary-linked, low long-term interest rates to issue bonds to pay for more government safety net programs, especially ones linked to healthcare coverage and retirement security. In our view, this idea is a big one that we think could ultimately help reduce the country’s high savings rate to more normalized levels. In doing so, it would also reduce fixed investment if confidence can be restored, which would allow the marginal propensity to spend to normalize again. Finally, we also believe that policy might be needed, especially during the current AI transition, to match the 11-15 million of university grads that are entering the workforce each year at a time when annual retirees are ‘just’ 8-12 million (see below for more details).

EXHIBIT 3: Despite Direct Material Declines in Exports to the U.S. from China, Strong Non‑U.S. Demand and Re-Routing of Supply Chains Has Supported China’s Overall Export Performance

China Exports, Y/y

EXHIBIT 4: Experiential and Cultural Consumption Has Boosted China Domestic Tourism, While Visa Easing Is Lifting Inbound Travel

Total Number of Tourist Trips Made, Domestic (Chinese Citizens) and Foreign Tourist Arrivals

3. China’s AI strategy is scaling rapidly, but with distinct differences as well as similarities to the United States.

Comparable to the U.S., AI is now central to all-things China. We met with executives across auto, robotics, and consumer services, and all anyone could talk about was how AI is upgrading their productivity performance. Also, similar to the U.S., China is seeing well-funded private start-ups battling large, entrenched tech incumbents with millions, if not billions, of existing consumer touch points. There is also increasing concern in both China and the U.S. about intensifying cyberattacks and misuse of AI if placed in the wrong hands. Finally, also consistent with the U.S., Chinese business executives are working hand in hand with local AI entrepreneurs en masse to drive productivity that dwarfs what we are seeing in some other countries in Europe and Asia. In contrast to the U.S., however, China is also pursuing a much more consumer-oriented, lower cost model that does not define success by touching the outer boundaries of what is achievable. Said differently, AI adoption is surging through a consumer-driven grassroots effort that is not as heavy-handed as the enterprise focus in the United States. It also costs less, which we think is part of the master plan to increase adoption. The other big difference with the U.S. is that there also appears to be less concern around disintermediation risks relative to what we are hearing in markets such as the U.S. and India. One can see this in Exhibit 5. In terms of who is winning the AI race, we are not 100% sure, but our takeaway is that scale will matter, and one or two large existing technology platform companies and maybe some new entrants are likely best positioned to capture the most value in this ‘winners take most’ segment of the tech stack.

EXHIBIT 5: Most Chinese Deeply Trust AI, While in the United States We See the Opposite Trend

Edelman Trust Barometer Survey: % of Respondents Who Trust AI 

4. China’s supply chain position appears more resilient than most, though not without internal strains.

Relative to other parts of Asia that I have visited recently, supply chains in China currently feel more stable, with pressures more concentrated in select areas such as high-end memory chips rather than around broader inputs like helium, plastics, or petrochemicals. Importantly, this relative resilience reflects China’s ability to rely more heavily on domestic energy sources, including coal (61% of total energy) and renewables (10% of total energy), which has allowed it to absorb the initial shock from the Middle East conflict and take it more in stride than many of its global peers. That said, beneath the surface, there are still areas of vulnerability within China. In particular, we had several discussions around the financial strain facing local governments, where traditional funding models, especially those tied to land sales, are under pressure, reinforcing the need for ongoing structural adjustments. Also, the marginal propensity to spend remains challenged, and as referenced earlier, the savings rate at 32% remains abnormally high (and remember savings = investment, which ultimately often leads to overcapacity).

5. We spent a lot of time learning more about advanced manufacturing, with a specific focus on robots.

Our discussions across the region, including time spent with leaders in robotics and automation, reinforced just how quickly China is scaling capabilities across advanced manufacturing. We met with leaders of a global start-up to better understand potential applications, particularly across healthcare to industrial production to logistics, over the next five years. This meeting did not disappoint, and we view the opportunity as significant. Importantly, this push is not just cyclical; it is strategic. The reality is that advanced manufacturing is now likely a key underpinning of China’s upcoming 15th Five-Year Plan, reflecting a broader shift towards industrial upgrading, digitalization, and green investment. As such, we believe these areas, not a sharp acceleration in consumption, are likely to be the primary drivers of growth going forward, a view that is consistent with what we are seeing in our own GDP modeling (Exhibit 2).

6. Meanwhile, consumer behavior in China is increasingly segmented.

What is working today is not broad-based consumption, but rather targeted pockets of strength. Large-scale discounters (e.g., PDD), membership-based models (e.g., Sam’s Club), and digital platforms such as ByteDance are gaining share. Notably, impulse-driven online purchasing is becoming more prominent, particularly on platforms like Douyin, where we think that nearly 40% of purchases come from impulse purchases, compared to 11% for TMALL/Taobao. In terms of sectors, consumer health continues to demonstrate strong growth as does pet care. What surprised us, though, is that some of the growth in spending is occurring in Tier III and Tier IV cities, suggesting more geographically dispersed consumption growth.

7. China is still flirting with deflation, but it does feel like a bottom may soon be reached.

While China is still contending with deflationary forces, there are early signs that the trough may be near. In this type of pricing environment, multinational companies have become more circumspect about what their go-forward business strategy is in China, which is creating investment opportunities for Private Equity. One notable trend we picked up during our visit is an acceleration in corporate carve-outs and restructuring activity across China, especially as international firms reassess their footprints and capital allocation priorities.

8. Still more work to be done?

While China has made progress in recent quarters, we believe that there is more that could be done to both improve growth and attract attention from longer-term investors. For starters, the country still needs to focus more on building out its services economy, especially around retirement and healthcare security. We also think that the country may want to consider letting foreign direct investment be repatriated. To be sure, it is extremely beneficial that domestic flows are accelerating (Exhibit 1), but over the coming years China cannot generate enough domestic capital to fund all its growth, especially as the economy matures. Shaky local government finances, especially when coupled with deflationary local competition, are dampening inflation and spending expectations. As such, China also likely needs to get its high-end consumers to spend more on services and to keep the spending on domestic experiences such as travel and entertainment more at home than abroad. Finally, as mentioned before, we think that China should take advantage of its low rates to issue long-duration bonds to jump start some type of more comprehensive social safety net program.

EXHIBIT 6: We Believe That Sectors Like Leasing & Business Services, Healthcare, Wholesale and Retail, and Hospitality Need to Represent a Bigger Share of Services

Services Subsectors as a % of GDP 

What do we think this means for investing? Looking at the bigger picture, our trip reinforced at least three major observations that have recently surfaced across all my meetings in the Americas, Europe, and Asia. First, as we move away from what my colleagues General (Ret.) David Petraeus and Vance Serchuk have described as a period of benign globalization towards one of great power competition, my travels lead me to believe that political leaders around the world are increasingly weaponizing economic pressure points to create leverage with their immediate competitors as well as long-term adversaries (Exhibit 8). In our view, this reality is not an aberration, but the beginning of a trend that all investors must incorporate into their thinking. For us at KKR, it reinforces both our investment theme of the ‘Security of Everything’ as well as our Regime Change asset allocation framework.

EXHIBIT 7: We Think 2026 Will Remain a Higher Inflation Environment and That Our Regime Change Narrative Will Continue

Low and High Growth and Inflation Regimes

EXHIBIT 8: National Security Is Now Bundled With Rule of Law and Economics/Trade, and Wrapped in the Complexity of Digitalization

Blurring of Lines Across Economics, Rule of Law, and National Security

EXHIBIT 9: Critical Minerals Have Emerged As An Important Economic Battleground

Share of Top Producer Refined Energy-Related Strategic Minerals

For example, in recent months China, through its substantial market share in the critical heavy minerals universe (Exhibit 9), has gained leverage against many of its largest trading partners and sometimes political rivals. However, China is not alone, and we increasingly see other nations following suit to achieve their economic and political goals, which are increasingly blurring across the ‘traditional’ lines of economic priorities and national security.

Second, Iran’s ability to gain control and disrupt the Strait of Hormuz, even intermittently, underscores the growing importance of bottlenecks in an increasingly fragile global supply chain. What was once a ‘just-in-time’ system is now shifting towards a more ‘just-in-case’ framework, where redundancy, resilience, and security matter as much as efficiency. Beyond the human tragedy in the Middle East, these developments raise broader questions around the rules of global commerce, from shipping access to settlement mechanisms, including the potential use of alternative currencies, especially if Iran is able to receive a transfer tax on ships via crypto or RMB.

Third, in a world of more heightened uncertainty, greater flexibility in capital structures has gone from a ‘nice-to-have’ to a prerequisite of success in many instances these days. Indeed, against a backdrop of rising geopolitical conflict, increasing AI-driven disruption, and evolving dynamics within Private Credit, liquidity — even though we still forecast decent global growth — has become paramount. The reality is that the range of potential outcomes has widened in ways that are not always easily quantifiable. As such, having the capital flexibility to pivot one’s business model to not only play defense but also to take advantage of the evolving opportunity set has become much more of a distinguishing feature for the executives and politicians with whom I am meeting.

What does all this mean for investing? We believe that we are still in a Regime Change, a backdrop driven by bigger government deficits, heightened geopolitics, a messy energy transition, and stickier, more volatile good and services inputs. Against this backdrop, we see the following:

1. Stocks and bonds are increasingly moving together, challenging traditional portfolio construction (Exhibit 10). One of the more important shifts we have been observing in recent years is the breakdown of the historically negative correlation between equities and fixed income. In prior cycles, particularly during periods of financial stress, bonds provided a reliable hedge as equities sold off. However, more recent episodes, including Russia’s invasion of Ukraine, ‘Liberation Day,’ and the U.S. strike on Iran, suggest a different dynamic, wherein both asset classes have come under pressure simultaneously. We view this as a key confirmation of our Regime Change framework that ‘this time is different’.
2. The expected returns we model between the best and the worst returning asset classes are now as narrow as we have seen in years. In this environment, beta alone is unlikely to deliver the outcomes investors have grown accustomed to. Instead, manager selection, non-correlation, and upfront yield become more critical drivers of performance. The importance of this view is reflected in our own capital allocation decisions, including KKR’s recent strategic investments in Arctos, Healthcare Royalties (HCR), and KJRM in Japan, all of which are designed to enhance access to differentiated return streams and improve overall portfolio construction.
3. Control, operational expertise, and thematic investments are becoming increasingly critical to outperformance, in our view. In the new world order we envision, characterized by higher volatility, tighter return dispersion, and more frequent shocks, simply providing capital is no longer sufficient. Instead, we believe that greater control over origination, coupled with deep operational expertise, are required to consistently generate attractive returns. At the same time, we think a more thematic approach to investing is essential. Key areas of focus include the Security of Everything, Energy and Power Resiliency, Productivity and Worker Retraining, Collateral-Based Cash Flows, and the ongoing shift from Capital Heavy to Capital Light, including corporate carve-outs of non-core subsidiaries. Collectively, these themes reflect where capital is needed most and where we believe long-term value creation will be most durable.
4. We still think that Asia can represent an important diversifier for global portfolios, especially in private portfolios. As we show in Exhibit 11, Asia assets can help with both performance and diversification. Importantly, Private Markets allow investors to get long GDP-per-capita growth, as well as corporate reform stories. By comparison, many publicly traded benchmarks, especially equity indexes across the region, are over-concentrated in state run financial institutions, commodity producers, and industrial companies, many of which are more directly linked to government policies than we generally prefer.

EXHIBIT 10: The Forward-Looking Expected Range of Outcomes Will Be Narrower, We Believe

Expected Return Range of Outcomes, %

EXHIBIT 11: Adding High Quality Asian Private Market Exposures to an Existing Portfolio Focused On the U.S. Can Often Help to Add Return and Dampen Volatility in Many Instances

Targeted Return and Expected Returns of Public + Private Portfolios Featuring U.S. and U.S. and Asia Assets

Bloomberg TV Interview: China’s Growth Story Has Shifted