China's economy is expected to rebound next year and sustain the rally in Chinese equities, though market volatility could remain elevated, prominent investment banks and wealth managers said on Wednesday.

"In terms of economic growth next year, China tells a rather compelling story compared to many global peers," said Kinger Lau, chief China equity strategist at Goldman Sachs.

According to the investment bank's forecast, China's GDP growth may rebound from 3.0 percent in 2022 to 4.5 percent in 2023, meaning the world's second-largest economy may outshine other major economies next year as global downward pressures intensify, Lau said.

Earnings growth of Chinese equities is expected to pick up as economic prospects improve. Also, valuation levels may recover supported by market expectations over optimizations in COVID-19 containment, adjustments in internet sector regulations and signs of mitigating delisting risks facing US-listed Chinese issuers, Lau said.

Goldman Sachs remains overweight on Chinese equities and forecasts the benchmark CSI 300 index to reach about 4500 points by the end of 2023, implying approximately a 16 percent gain from now, Lau said.

Macroeconomic policy also favors Chinese equities. China's fiscal and monetary policies may maintain an accommodative stance with controllable inflation levels in the coming three to six months, versus the ongoing rate hike cycle in the United States and Europe to tame sticky high inflation, said Goldman Sachs' chief China economist Shan Hui.

In terms of allocation among sectors, the investment bank has upgraded consumer services and healthcare equipment and services from neutral to overweight to capitalize on a potential rebound in consumer spending, while downgrading energy and tech hardware from neutral to underweight.

It also upgraded real estate from underweight to neutral as a series of supportive measures launched recently may help significantly tame the risks facing the sector.

China's benchmark Shanghai Composite Index edged up by 0.05 percent to close at 3151.34 points on Wednesday, marking the highest level in two-and-a-half months and sending its gains since the beginning of November to 8.91 percent.

Hu Yifan, regional chief investment officer and head of macroeconomics for Asia-Pacific at UBS Global Wealth Management, said the Swiss wealth manager remains neutral on China's stock market despite the country's improving growth prospects.

Market volatility may remain elevated in the coming three to six months as COVID-19 uncertainties continue to weigh on economic activity and market performance, Hu said, adding that UBS favors defensive sectors such as consumer staples to weather the short-term fluctuations.

A significant economic rebound may occur in the second half of 2023 as China's economy is expected to gradually overcome COVID-related disruptions, Hu said. If the expectation comes to pass, GDP growth could be about 5 percent in 2023, up from an estimated 3 percent this year.