Take artificial intelligence (AI). While American tech giants stumbled over DeepSeek’s breakthrough in large language models, triggering what some called the “DeepSeek Shock”, astute investors recognised something more significant: China’s emergence as a genuine AI competitor, achieved at a fraction of Western development costs.
This wasn’t just about one company. DeepSeek’s success illuminated China’s “soft infrastructure” advantages: abundant engineering talent, accumulated technical knowledge, and companies willing to deploy capital generously. When Chinese firms submitted 1.64 million patent applications in 2023 (triple their US counterparts), it signalled a fundamental shift in innovation capacity.
But here’s where most investors go wrong: they either dismiss Chinese AI entirely due to geopolitical fears or embrace it wholesale without understanding the risks. The reality demands surgical precision.
Sector surgery required
The electric vehicle sector exemplifies this nuanced opportunity. CATL’s recent US$4.6 billion ($5.9 billion) Hong Kong IPO was the world’s largest this year. This massive offering validates China’s commanding position across the entire EV ecosystem, from batteries to finished vehicles.
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The numbers tell the story: China’s power battery installations hit 54.1 GWh in April, up 52.8% year-over-year. CATL alone controls 39.4% of China’s market and 38.3% globally. Combined with BYD’s vertical integration from batteries to consumer sales, Chinese companies have constructed an ecosystem that would take competitors years to replicate.
Yet this strength comes with geographic concentration risk. Smart investors should favour companies with diversified manufacturing footprints and global customer bases. These are firms that have already adapted to trade uncertainties by building resilience into their operations.
The macroeconomic reality check
Let’s not sugarcoat the challenges. China’s GDP growth forecasts have tumbled, with the IMF slashing 2025 projections to 4.0% from 4.6%. The property sector remains wounded, demographics are deteriorating, and debt levels constrain policy flexibility.
See also: Invest in Asia’s resilient economies to protect portfolios in volatility: HSBC
More concerning is the structural nature of US-China competition, which transcends any single administration. Technology restrictions will likely persist, creating ongoing headwinds for Chinese firms dependent on advanced semiconductors or global market access.
But markets are forward-looking mechanisms, and much of this pessimism appears already priced in. Chinese equities trade at significant discounts to developed market peers, while investor sentiment remains persistently negative —classic contrarian indicators.
For the cautious optimist
Rather than binary allocation decisions, investors should adopt “barbell positioning”: defensive domestic consumption is balanced with selective high-growth opportunities.
On the defensive side, target companies serve China’s expanding middle class and ageing population. Healthcare service providers, domestic consumer brands, and e-commerce platforms with established ecosystems offer growth potential insulated from trade tensions.
For growth exposure, focus on sectors where China has established competitive advantages: renewable energy manufacturing, EV supply chains, and AI applications for domestic markets. But emphasise companies with strong balance sheets and limited reliance on external financing. This financial strength will prove crucial if conditions deteriorate.
Critically, diversify across listing venues. Balance Hong Kong-listed companies with mainland-listed firms and carefully selected US ADRs to mitigate regulatory and delisting risks.
The 90-day window
The current trade truce provides breathing room, but 90 days won’t resolve structural tensions. Use this period wisely: build watch lists of quality companies, establish smaller position sizes with room to average down, and implement hedging strategies for larger allocations.
Currency hedging merits particular attention. The yuan’s volatility amid divergent monetary policies and trade tensions creates additional risk that investors often overlook until it’s too late.
Ongoing transformation
Investment success in Chinese equities won’t come from market timing or macro predictions — it will emerge from identifying companies that can thrive regardless of geopolitical weather patterns. Focus on businesses with sustainable competitive advantages, limited vulnerability to external shocks, and management teams with proven execution records.
The recent trade agreement offers a window of reduced uncertainty, but the long-term case for selective Chinese equity exposure rests on something more fundamental: the ongoing transformation of the world’s second-largest economy from a manufacturing hub to an innovation centre. This transition won’t be smooth or swift, but for investors with patience and discipline, it may prove highly rewarding.
Christopher Forbes is the head of Asia, CMC Markets
