Newsletter commentary Feb 2025

The New Narrative of Investing in China Has Begun

In February, the A-share indices appeared relatively stable, but KWEB and the Hang Seng Tech Index showed strong momentum. Within the A-shares market, sectors such as automobiles and TMT saw significant gains, as did the steel industry. The former is directly related to AI, while the latter is linked to easing internal competition. February market exhibited signs of a structural bull market, and whether broader economic recovery signals can support more industries and companies remains to be seen.

The February market reflected several important new messages. First, after a seven-year gap, a symposium for private entrepreneurs was held. Over these years, China experienced the pandemic, real estate adjustment, fiscal discipline reforms, regulatory rectification, and economic tensions with the U.S. Time acts as a filter, removing noise and illusions. After seven years of reflection, perspectives on many events have become more comprehensive for all participants.

Notably, the composition of private entrepreneurs attending the symposium has also evolved with the times and been diversified, including technology, new energy, auto, Internet, agriculture and food. The discussions have shifted from focusing on survival from the past to a stronger emphasis on development, global operations, and technological progress. Private enterprises have now played a unique role in technological advancement and promoting common prosperity for society. In recent years, global investors have harbored concerns about China’s business environment. However, following this symposium, expectations for a more transparent and constructive government-business relationship should improve.

Second, the entire society—and even the world—is actively integrating DeepSeek’s large model. With its open-source nature, low cost, and high quality, this AI model has rapidly accelerated the adoption of large models across various industries while disrupting the previously closed and expensive large-model ecosystem, including its supply chain. The surge in usage has led to a dramatic increase in computing power consumption. However, unlike before, the supply logic behind this increase has shifted from exclusivity and closed systems to diversified and cost-effective solutions. In the past, each iteration and release of a large model would trigger a frenzy of expectations for increased computing power demand. However, with DeepSeek, the trend appears to have reversed. Recent iterations and releases of other models have shown a similar pattern—even large-scale models requiring massive computational resources (e.g., 100,000 GPUs) have not demonstrated performance improvements of an order of magnitude. As a result, the AI narrative is now shifting towards practical applications, an area where Chinese enterprises excel.

While we remain optimistic that large models may still achieve another breakthrough, there is currently insufficient evidence to support this. We will take a wait-and-see approach. Moving forward, the primary driver of increased computing power consumption will likely be multimodal AI models. The latest release from Qianwen, for example, which was developed by Alibaba Cloud, has demonstrated a high level of performance. The industry is evolving at an incredible pace, and current observations suggest that China’s industrial supply chain remains highly competitive. Even if future supply chain dynamics change, the existing trajectory of large-model technology ensures that China’s independent supply chain remains viable.

Third, based on early 2024 economic data, monetary and fiscal indicators appear positive, and consumer spending has not exhibited the sluggish trends seen during the 2023 and 2024 Spring Festival periods. While this year’s data does not yet provide strong evidence of a full economic rebound, overall sentiment is not negative. Additionally, a potential game-changer this year could be policy measures aimed at reducing excessive internal competition. In recent years, excessive competition has contributed to weak prices and insufficient demand. For instance, e-commerce platforms have primarily allocated traffic based on low prices, leading to a race to the bottom while neglecting other important product attributes. This approach has not necessarily benefited merchants, consumers, or delivery providers. Recently, discussions on this issue have become more prominent, and we believe that efforts to address excessive competition could play a significant role in stabilizing prices beyond normal economic cycles.

The real estate sector has shown some promising signs after the Spring Festival, with positive trends in land sales revenue and second-hand housing transactions. Following the nearly 50% drop in new home sales and significant price declines, 2025 is expected to see a substantial reduction in real estate’s drag on the economy, and we are beginning to see early evidence of this shift.

Fourth, in terms of the external environment, some geopolitical disputes have entered a phase where resolution efforts are beginning, though the associated power struggles remain intense. China continues to uphold an objective and impartial stance, which provides it with greater strategic freedom. This period also presents an opportunity for others to recognize China’s fairness and neutrality—after all, “Virtue is not solitary; it always has neighbors.” 

The U.S. government has increasingly abandoned multilateral negotiations in favor of one-on-one negotiations, leveraging its power to pressure weaker nations into compliance. However, as this strategy is used more frequently, other countries will gradually become more aware of its implications. Just like DeepSeek’s open-source philosophy, China’s path will only become broader, while closed, expensive “large models” will find their paths narrowing. We may still be in a transitional phase of perception, but once the shift begins, it will happen rapidly.

The narrative of investing in China has shifted from the American-style discourse of 2019–2020 to the increasingly dominant Japanese-style narrative of 2024. While these narratives may seem contradictory, they are in fact closely connected. When stock prices rise and fall, people tend to forget their fundamental principles. During market upswings, the stories keep expanding—much like what is happening in the U.S. stock market today. In reality, many U.S. stocks are astonishingly expensive, and even the so-called “Magnificent Seven” are among the more reasonably priced ones. A large part of what investors do is justify rising stock prices.

The Japanese-style narrative, however, is even less insightful. Comparing an 80-year-old to a 30- or 40-year-old and stating that they have the same organs may be factually correct, but it is ultimately meaningless—it provides no real understanding of their conditions. Seven years ago, if you listed Japan’s most representative companies and compared that list to today, the names would likely be the same. In fact, they might even match those from 20 or 30 years ago. 

Now consider China’s industrial and corporate evolution over the years. Five to ten years ago, China’s electric vehicle (EV) industry was still in its infancy, solar and wind energy were relatively small, and the pharmaceutical industry was dominated by generic drug manufacturers before the reforms led by Bureau Chief Bi. The semiconductor sector had only a handful of publicly listed companies. Today, China’s EV and renewable energy industries hold a dominant global position. The pharmaceutical industry saw nearly ＄60 billion in license-out transactions last year. The semiconductor sector now boasts hundreds of listed companies, and it has surpassed EVs as China’s top export category. These industries have successfully built out their entire value chains. As market participants, we trade every day, but we often lack a long-term perspective. Whether looking forward or reflecting on the past, we tend to focus too much on the microscopic details, analyzing superficial wrinkles and signs of aging while overlooking the beauty of the overall system.

A deep appreciation is owed to Chinese entrepreneurs and businesses—both private and state-owned—as well as to the government officials who work tirelessly. Many emerging companies today have benefited from proactive government efforts in investment promotion and industry support. The semiconductor sector has been shaped by the presence of the National Integrated Circuit Industry Investment Fund (the “Big Fund”), while EVs and solar energy have thrived under long-term industrial policies. We should openly acknowledge that an active and capable government is one of the strengths of China’s economic system. At the same time, we must recognize that, like the market, policies can sometimes go wrong. A more meaningful discussion lies in how the government and enterprises can better support each other. This dynamic transformation also explains why China’s real estate sector underwent a deep adjustment in such a short period after a 20-year bull run—yet the overall economy remains resilient.

The past one to two months may have been a pivotal moment, as they have reignited investor interest in China—this time with a different perspective. China’s economy has always been telling a unique story, one that has never been seen before. However, our own cognitive limitations have constrained our understanding, forcing us to interpret it through the lens of either the U.S. or Japan. Now is the time to reassess this story. What is unfolding in China is the largest modernization effort in human history—within a single, unified market, built on relatively fair and non-exploitative transactions, driven purely by effort and innovation. This process is inevitably filled with challenges and struggles, and that, too, is part of China’s story.

The world’s largest and most comprehensive industrial system has already been established, forming the foundation of China’s economic model. It has been evolving in ways that we may not have fully recognized. The recent breakthroughs with DeepSeek’s large model and animation Nezha 2 serve as reminders: China is not just about the cutthroat competitiveness of manufacturing, which in recent years has sometimes felt suffocating. It is also home to boundless creativity, relentless innovation, an open-source spirit, a strong product-driven mindset, and highly competitive pricing.

Short-term market fluctuation is a different matter—when stocks rise too much or too fast, new challenges inevitably emerge. But adopting a different perspective allows for a different judgment of long-term value and greater patience. Looking globally, many assets in China that are still caught in intense competition remain highly valuable. All they need is the right stage or an opportunity to reduce internal competition. Instead of reacting passively, we first anticipate potential changes and then take action based on real developments.