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Thought of the day

US-China tech tensions are back in focus this week, as a bipartisan group of US senators introduced the SAFE CHIPS Act, aiming to prevent the Trump administration from potentially easing restrictions on advanced AI chip exports to China. This legislation underscores persistent concerns in Washington over Beijing’s access to cutting-edge AI technology. President Trump and NVIDIA's CEO Jensen Huang met this week, with talks said to include discussion over US export controls and China’s advances in the AI sector.

At the same time, China’s domestic chip sector is gaining momentum. Chinese startup Moore Threads Technology, often dubbed “China’s NVIDIA” in local media, soared more than fivefold in its Shanghai IPO and has raised USD 1.13bn. Meanwhile, China’s tech sector earnings have largely exceeded expectations, supported by progress in AI monetization, expanding cloud services, and robust policy support.

Despite these positives, global concerns about the sustainability of the AI rally have capped gains for Chinese tech stocks. The Hang Seng Tech Index has declined in six of the past nine weeks. But we believe the investment case for Chinese equities, and its tech sector in particular, remains compelling for several reasons:

Chip localization is underpinning domestic tech resilience. Regardless of what happens to US advance chip exposures, China’s semiconductor sector is making its own rapid advances. Moore Threads’ successful IPO and a wave of new listings reflect Beijing’s drive for tech self-sufficiency and the rapid clip of domestic innovation. Chinese foundries and equipment makers are overcoming supply chain challenges, supported by government investment and vertical integration. We estimate the localization rate for AI chips in domestic data canters could reach 50% by 2027, positioning China for greater independence in AI development, regardless of whether US export restrictions persist or not.

China AI monetization is fueling earnings growth. The latest round of earnings revealed leading tech platforms are successfully leveraging AI to unlock new monetization channels in advertising, cloud, and enterprise services. Despite recent profit-taking and mixed management outlooks, we believe sector fundamentals remain robust, with tangible benefits from AI deployment and ongoing breakthroughs. We think China’s AI spending is set to grow further, enabling domestic leaders to scale innovation and capture new revenue streams, with the China sector not facing the same investor concerns over the sustainability of its capex spending.

China's equity rally is broadening beyond tech. The rally in Chinese stocks is expanding into high-dividend financials, power and resources stocks, and health care, all of which outperformed during recent tech drawdowns. Lower cash rates and steady consumption are supporting these segments, while “going global” consumer companies and pharma/biotech offer solid growth prospects. Diversification across these themes can help smooth returns and reduce portfolio risk, in our view.

So we suggest looking through any near-term US-China geopolitical noise, and instead focusing on China’s resilient fundamentals and its constructive outlook. For global investors, China’s ongoing tech localization drive, its progress on AI monetization, and its intra-sector diversification offer a strong foundation for returns into 2026, in our view, offering a compelling way to build ex-US AI exposure. Moreover, valuations in China look relatively attractive as compared to global peers, at around 12 times forward price to earnings (P/E) versus close to 23 times for the S&P 500. We recommend using any pullbacks to build exposure to China's tech sector, while maintaining exposure to the market's high-yield and growth sectors such as financials, health care, select materials, and new consumption.

We also see opportunities outside China. While big US tech companies’ capex intensity and depreciation expenses are both likely to rise, we forecast relatively resilient margins close to 27%. We do recommend investors diversify their investments across the AI value chain, encompassing the enabling, intelligence, and application layers. Our strategic focus will increasingly favor the applications layer, as we anticipate that companies operating within this segment will benefit most from ongoing AI-related capital expenditures.