Managed rivalry, emerging opportunity – China’s equity renaissance

After years in the doldrums, Chinese equities have staged a sharp rally this year.

The launch of DeepSeek early in the year ignited a speculative fever in anything remotely AI-related, which then broadened into a solid run across the onshore market and a revival of IPO activity in Hong Kong. Even an April wobble, triggered by Donald Trump’s new “Liberation Day” tariffs, proved temporary. Since then, Chinese shares have marched higher.

Behind the cheerier equity markets stands an economy that is not so much stalling as changing gear. On the ground, sentiment is cautious but far from despairing. The divergence between sectors is striking, and increasingly encouraging for those focused on structural rather than cyclical growth. Technology related industries tied to global AI demand are thriving. Purely domestic consumer businesses are slower to recover, when property prices continue to drift down, but this is no longer the old Chinese cycle of synchronized boom and bust. It is a reallocation: momentum shifting from bricks and mortar to bytes and batteries.

For investors – this means that simply ‘owning China’ is not good enough. The market is rewarding those aligned with the new growth engines, while legacy sectors are being forced to adapt or shrink. It is no coincidence that Chinese banks have rallied only after a bruising period of underperformance and offered yields too tempting for long-term domestic capital to ignore. Insurers and pension funds, busy positioning portfolios for next year, have been quietly rotating into high-dividend plays. The result is less a nostalgic bet on the old growth model and more a pragmatic shift towards value, income and balance-sheet strength.

Electric vehicles offer a clearer illustration of China’s evolving investment opportunity set. EV share prices have suffered this year, even as battery-powered cars march towards dominance. Penetration has already reached roughly 55% of new car sales, with adoption in big cities far higher still. The problem for investors is not demand – which remains robust – but competition: too many brands, too many models and a leadership board that changes every year. Trying to pick the ultimate volume champions can be hazardous.

The smarter play lies in the supply chain. As car roofs turn from steel to glass, the value of glass per vehicle has roughly doubled, benefiting a handful of dominant Chinese glassmakers. Likewise, battery production is concentrated among a few giants with global reach. The winning nameplate on the bonnet being domestic or foreign matters less if the same suppliers are involved. In a market prone to fierce price competition, control of bottleneck technologies and components offers something closer to durable pricing power – and a more predictable earnings profile.

China's power supply is massive and stable, backed by years of infrastructure investment into its vast power grid, which give its AI ambitions another quiet advantage. Over the past decade it has built power capacity by most conventional measures, especially in solar, wind and other low-carbon sources. What once looked like excess is now being steadily absorbed by the energy-hungry data centers needed for AI training and inference.

The US frets that demand for GPUs may outstrip the grid’s ability to power them; China, by contrast, has ample generation and is racing ahead in grid-scale battery storage, which smooths out the intermittency of renewables. In the global AI arms race, cheap and abundant electricity is as important as clever algorithms – and on that score China starts in a relatively strong position.

Not that every technological bottleneck has been cracked. In semiconductors, the country is a net exporter at mature nodes but still reliant on imports at the cutting edge. Local firms can, in principle, produce seven-nanometer chips using older lithography equipment by repeating exposure steps. But this ingenuity comes at a cost: yields fall, energy use rises and unit economics deteriorate. China remains several generations behind the likes of TSMC in manufacturing sophistication. Closing the gap will require progress not only in design talent, where it is rapidly improving, but also in tools, software and fabrication equipment – a multi-year undertaking rather than a quick fix. The direction of travel, however, is forward rather than sideways.

Externally, tariffs and de-risking have not produced the collapse in China’s export machine that some in Washington once imagined. Exports directly to America have fallen, but overall shipments have held up Chinese entrepreneurs, long accustomed to living with shifting policy winds, have diversified their manufacturing footprints accordingly. The system is proving more adaptable than its critics assumed. This speaks to a deeper reality that matters greatly for investors in Chinese equities: economic interdependence between China and the West remains high, even if the political rhetoric is frosty. China still accounts for the vast majority of high-end printed circuit boards used in AI servers; without them, even the most advanced American chips are just expensive slices of silicon. A large share of global pharmaceutical R&D is either conducted in China or relies on Chinese contract research and manufacturing. Some supply chains, such as smartphone assembly, have diversified; others have quietly become more reliant on the mainland.

For all the noise about decoupling, neither Washington nor Beijing can easily afford a genuine rupture that would disrupt these flows and risk economic turmoil at home. The more plausible path is a messy, noisy ‘managed rivalry’ punctuated by tariff scares and sanctions, but underpinned by ongoing trade and investment in critical areas.

For equity investors, that implies an outlook defined less by macro bravado and more by careful stock selection. The broad Chinese economy may grow more slowly and unevenly than in the past, but within it are companies tied to enduring themes: electrification, digital infrastructure, energy storage, and the underappreciated plumbing of AI.

China’s transition will not be effortless, and politics will continue to deliver periodic shocks. But for those willing to look beyond the headlines, its equity market increasingly resembles not a monolithic risk, but a diverse marketplace of specific, and in many cases growing, opportunities.