Asia Mixed: China Battles Deflation While Korean AI Stocks Surge

Asian markets are displaying a sharp divergence in early 2026. While China grapples with entrenched deflation and weak demand, South Korea is riding a wave of foreign capital inflows driven by the global Artificial Intelligence (AI) boom.

China: The Case for Aggressive Easing

Data indicates that China's economy is running below its potential, with the PPI (Producer Price Index) remaining in negative territory for over 39 months. The CPI (Consumer Price Index) has flatlined, falling significantly short of the 2% target.

• Policy Outlook: Analysts are urging the People's Bank of China (PBOC) to maintain a loose monetary stance throughout 2026. Expectations are high for further cuts to both the Reserve Requirement Ratio (RRR) and key interest rates.
• Forex Impact: The divergence between a dovish PBOC and other major central banks continues to put structural pressure on the Chinese Yuan (CNY). However, significant fiscal stimulus packages anticipated in the “15th Five-Year Plan” could offer support to commodity currencies like the AUD and NZD if infrastructure spending ramps up.

South Korea: Institutional Buying Drives KOSPI to 4900

In stark contrast, South Korea'sKOSPI index has broken the 4900 barrier, gaining 1.3% intraday and 15% year-to-date.

• Institutional Shift: The rally is characterized by a “Foreign In, Retail Out” dynamic. Global funds maintain a strong appetite for Korea's memory chip giants, betting on a sustained semiconductor super-cycle through 2029.
• Valuation: Despite the rally, the MSCI Korea Index trades at a forward P/E of just 10.9x, suggesting valuations remain attractive relative to peer markets.
• Risks: Investors remain wary of external shocks, particularly regarding US trade policy and the potential for spillover volatility if the “Trump Trade” shifts gears.

For Forex traders, the strength in Korean equities often correlates with a supportive environment for Asian emerging market currencies, though the aggressive strength of the USD remains the dominant global factor.