Overview
Aside from fireworks and dumplings, watching the televised annual Spring Festival Gala - or chunwan - has been a holiday tradition for every Chinese family on the eve of Lunar New Year. The four-hour show is a jumble of songs, dance routines, and skits. This year though, there was something else.
A fleet of 16 humanoid robots, not dissimilar to the chatty C-3PO from Star Wars, performed a traditional Chinese folk dance. They moved in perfect unison, following the rhythm and displaying complex tricks, including spinning handkerchiefs and even succeeding in tossing and catching them with precision. Although some of the moves looked a little stiff, the three-minute performance, which showcased China’s growing capacity for innovation in robotics, quickly went viral on social media platforms.
Just one week earlier, DeepSeek, a small Chinese startup based in the eastern tech hub of Hangzhou, stunned the world by introducing a low-cost AI model that nearly matched the performance of its much more expensive American rivals. Within days, Alibaba, a Chinese tech giant, released a new version of its Qwen 2.5 AI model which it claimed could outdo both DeepSeek’s V3 and Meta Platforms’ Llama from the US. The flurry of news, plus the dancing robots, sparked a wave of interest in China’s technology stocks.
Reality check
In the past two years, structural issues such as rising debt levels, an aging population, and a property downturn have raised concerns about investing in China. The more pessimistic commentary talks of a slide towards a Japan-like debt deflation spiral that could last for decades. But the innovative breakthroughs witnessed over the new year should be a wake-up call for those caught up in short-term uncertainty. Despite the economic challenges, there are considerable stock-picking opportunities to be found over the long run in China, and not just in tech.
As the economy transitions from high-speed growth to a more balanced and sustainable model, Chinese policy has shifted focus from basic industry to advanced manufacturing and strategic technologies. Investment is being channelled to research and development – a shot in the arm that helps China to innovate without mimicking the products of Japanese, US, and European peers. China’s R&D expenditure increased 40-fold in absolute terms between 2000 and 2024 and reached a record high of 2.7 percent of GDP last year.[1] The vast pool of talent in a country of 1.4 billion is supporting the government’s ambition: China produced more than four times as many science, technology, engineering, and maths (STEM) college graduates as the US in 2020.[2]
The quest for ‘high-quality growth’ is starting to bear fruit. The world is seeing more Chinese companies move to the forefront of their sectors in everything from social media to electric vehicle (EV) batteries. Benefiting from an EV boom, the country has displaced Japan as the world’s largest vehicle exporter. Its record installations of solar panels in 2023 alone amounted to more than the US - or any other country - has ever built.[3] And in the case of AI, it’s quickly catching up.
New growth
Advanced manufacturing sectors have emerged as bigger drivers of growth on the supply side. Clean energy, comprising sectors including renewable energy sources, nuclear power, energy storage, and EVs, accounted for 9 per cent of China's GDP in 2023, up from 7.2 per cent in the previous year.[4] Innovation will also help Chinese companies across the board to raise productivity and move up the value chain, which will build resilience against tougher US trade policy.
Of course, high-end manufacturing alone can’t completely offset China’s economic problems. Weak consumer confidence has hampered recovery on the demand side. The property sector is still struggling, and local governments continue to grapple with hefty debt. Tech breakthroughs in many sectors haven’t translated into sustained profitability. And with rising trade tensions investors should be mindful that more short-term volatility is likely.
But a series of stimulus measures since September have shown policymakers’ determination to revive the economy. And the looming risk of more action on tariffs from the US will likely push the Chinese government to come up with more domestic stimulus to offset any adverse effects on the economy.
New productive forces such as AI, robotics, and smart cars are seeing and will probably continue to see a recovery in earnings growth. Valuations in general remain attractive, trading at deep discounts to international peers. The price-to-earnings ratio based on expected profits for Chinese companies sits at around 10, compared to 22 for the US and 20 globally, according to MSCI indexes.
Plus, given their low correlation with other major assets, the country’s domestic equities offer a good diversifier for global portfolio managers.
The short and medium-term challenges China faces are real. But with the economy increasingly driven by innovation and policy that supports technology and science, new and exciting ideas are bound to emerge. The structural rebalancing will provide a more compelling backdrop for Chinese equities - especially tech stocks - and for global investors.
[1] China’s National Bureau of Statistics
[3] China Added More Solar Panels in 2023 Than US Did In Its Entire History | Bloomberg
[4] China clean energy sector was biggest driver of 2023 GDP growth -research report | Reuters
