DeepSeek and Chinese AI Investments
We’ve seen China establish industry leadership before, even when it wasn’t the first mover. For example, Chinese companies didn’t invent electric vehicles or solar panels, but they now dominate these industries. Similarly, China’s cost-effective engineering talent and large end-market point to strong potential for Chinese firms to emerge as leading players in AI infrastructure and applications.
But buyer beware. Despite the strong potential, we caution investors against chasing the latest hot stocks in Chinese AI. However, we do think equity investors can find Chinese internet companies with AI exposure and valuations that remain reasonable, even after the recent rally. Enablers of AI technology, the proverbial “pick-and-shovel” makers, also deserve attention, including power producers, electric grid equipment makers and domestic electronic equipment manufacturers. These industries are likely to benefit from increased power demand due to AI adoption, especially as Chinese tech companies announce large increases in AI-related capex.
Growing Investor Interest
Nobody can say how long the recent China rally will last. But we’re encouraged because China’s current rebound isn’t driven by a single political speech or policy announcement. As we see it, investors are actively assessing the relative attractiveness of other asset classes and equity markets, and in today’s complex global conditions, some are finding China’s equity market potential to be appealing. Of course, Chinese markets can be volatile and policy decisions are hard to predict. Still, we think the proactive approach that is leading some international investors to reevaluate the Chinese market offers some hope that the current run might be more sustainable than the short-lived recoveries in the past.
Recent statements suggest that the government is committed to supporting the private sector in general and technology in particular. And ultimately, China’s future success will hinge on the government’s ability to effectively deploy policy measures to address challenges such as disinflation, weak consumer demand and trade wars.
What About Trade Wars?
No discussion of China’s equity markets can ignore the trade wars. Geopolitics—particularly tariffs and the threat of further industrial sanctions—remain the biggest uncertainty for the Chinese market. And it’s usually the main reason investors decide to avoid Chinese stocks.
While the risks of tariffs are real, we think they may be overstated. Over the past seven years, Chinese companies have prepared for tariff uncertainties by diversifying supply chains and relocating factories to Southeast Asia and Latin America. What’s more, since President Trump’s policies have been clearly telegraphed to the markets for months, we believe much of the impact of tariff hikes has already been priced into the Chinese markets.
So how can we reconcile these very different stories about tariffs and technology that are shaping sentiment toward Chinese markets today? Think about it as opportunity versus risk. DeepSeek shines a light on the long-term opportunity that China presents to investors, which can help offset some of the near-term tariff risks. Taken together, this reinforces the need for equity investors to be selective in identifying businesses that are less threatened by trade tensions while benefiting from the positive dynamics that will drive the next stage of China’s development in the 21st century.
