The China Briefing
The AI Leap Forward
China equities saw a second rally in the last six months with very different underlying reasons
Please find below our latest thoughts on China:
- Recent weeks have seen the second major rally in China equities in the last six months. The underlying reasons, though, are very different.
- The previous rally started last September in response to an unexpectedly strong pivot in government policy as well as clear support for domestic equities.
- This support included significant buying of domestic ETFs (not for the first time last year) as well as the People’s Bank of China (PBoC) signalling it would act as lender of last resort to backstop the market by extending significant amounts of credit for stock repurchases.
- The policy pivot was primarily focused on risk reduction – reducing the risk of significant further property and equity market weakness.
Chart 1: Performance of major stock market indices since Jan 2024 (USD, rebased to 100)
Source: LSEG Datastream, Allianz Global Investors, as of 18 February 2025
- The strength of the “Beijing put” helped put a floor under China A markets in particular, and triggered a recovery in domestic animal spirits. The level of margin trading, a good real-time sentiment indicator, recovered to levels last seen three years ago.1
- This latest rally is very different.
- The initial trigger was the release of a new AI model by DeepSeek, China’s equivalent of ChatGPT.
- While DeepSeek is not new – its first model was released in November 2023 – the timing of this latest announcement on President Trump’s inauguration day catapulted the firm into global consciousness.
- DeepSeek’s announcement has also focused attention on a range of other recent innovation-driven headlines. To name a few:
- Chinese blockbuster film Ne Zha 2 – think Kung Fu Panda meets Lord of the Rings – has become the world’s highest-grossing animated movie.2
- China has launched the world’s fastest high-speed train with a test speed of 450 km/h.
- TikTok’s parent ByteDance has launched “OmniHuman” which makes photos talk and sing.
- China is building the world’s largest nuclear fusion research facility.
- BYD, the biggest electric vehicle producer in China, unveiled an advanced self-driving system called “God’s Eye” which it plans to install across its model lineup.
- The key takeaway is that China is far more advanced in the global AI race than was previously understood.
- This is reinforced by patent figures. The World Intellectual Property Organization published a patent landscape report on generative AI last year that showed China was responsible for more than 38,000 filings between 2014 and 2023, compared with 6,276 by the US over the same period.3
- Of course not all patents have value or can be commercialised. But the number of patents granted still gives a good sense of overall commitment to innovation and the pursuit of technological leadership. And the high volume of China’s patents also suggests it may translate over time to more products.
- From an equity perspective, the realisation that China’s technology capabilities are far more advanced than previously thought has triggered a substantial re-rating of technology stocks.
- This is the reason why offshore China equities have performed particularly well – eight of the top 10 constituents of the MSCI China Index are related to technology, either as internet platform, ecommerce or gaming stocks.4
Chart 2: Combined market capitalisation of top 5 internet platforms in China (USD, billions)
Source: Bloomberg, Allianz Global Investors, as of 18 February 2025. Top 5 internet platforms refer to Alibaba, Tencent, Meituan, JD.com, and Pinduoduo.
- Adding fuel to the market rally was a high-profile symposium held this week by President Xi Jinping and attended by prominent private sector business leaders. In a highly symbolic move, this was the first time that Jack Ma, founder of Alibaba, had publicly attended a government meeting since the Ant Financial IPO was pulled in 2021.
- The fact that Xi Jinping chaired the meeting is also, in our view, clear confirmation of an important shift in policy direction with a focus on boosting private sector confidence.
- We have been asked a few times about the sustainability of the current rally, especially as it has been quite narrowly focused on internet and AI-related stocks.
- In terms of the technology space, it is notable that while the operating profits of China’s top five internet platform companies in 2024 were almost twice as high as they were in 20215 (the year of the regulatory crackdown), even after the recent rally the share prices remain well below peak levels.
- And while there are clearly still risks to be faced – tariffs, property, weaker export momentum – nonetheless there does appear to have been a very significant mood change.
- Over recent years, much of the focus on China has been on what could go wrong. Now attention has shifted. And this momentum will likely be encouraged as China’s technological advances are increasingly visible.
1 Source: Bloomberg as at 18 February 2025
2 Source: Reuters as at 18 February 2025
3 Source: Financial Times, 1 August 2024
4 Source: MSCI as at 31 January 2025
5 Source: Gavekal as at 18 February 2025