Innovation and resilience: how can China bounce back?
Kévin Net, Head of the Asia Division, La Financière de l’Echiquier │07.05.2025
As the trade war with the United States takes a new turn, what are the strengths and opportunities of the Chinese market?
Since the end of 2024, China has been attracting international investors once again. Will Donald Trump’s announcement of additional tariffs on Chinese products and the escalation of the trade war between China and the United States dampen this renewed momentum?
Innovation capacity intact despite obstacles
China’s potential has been viewed differently since the release of DeepSeek, a generative AI that offers performance comparable to Open AI’s ChatGPT at a lower cost. Other major innovations have also been unveiled, such as BYD’s ultra-fast charging system for electric cars and an ambitious space exploration programme. These successes are the result of relentless investment in research and development, with spending tripling between 2011 and 2022 to nearly $811 billion.[1] Today, nearly half of global patent applications come from China. These strengths are enabling the country to establish itself as a global leader in several strategic sectors.
Strategy of adaptation and autonomy
While the market is benefiting from the DeepSeek effect and in March returned to levels not seen since 2022, the return of the trade war triggered a correction. However, China has the means to resist. For several years, the country has been pursuing a strategy aimed at developing its self-sufficiency, particularly in the technology and energy sectors, and relocating its production facilities to sites close to end markets. China can also pivot towards its domestic market. As in 2024, it is rolling out targeted stimulus measures for consumption to boost consumer sentiment, which remains depressed, and unlock the significant savings accumulated during the pandemic. Also noteworthy is the olive branch extended to the private sector, which is the largest employer in China today.
Equity markets: geopolitical risks priced in
In terms of valuation, the Chinese equity market is currently trading at nearly 10.7 times earnings, below its historical average. Some are talking about the need to apply a “geopolitical discount”. Despite this risk, we are convinced of the strength of Chinese innovation. Moreover, the ability of companies to gain global market share remains intact, which justifies a rerating of the market. Unlike last September’s rally, which was driven by expectations of stimulus, the rally at the start of this year enjoyed traction from tangible positive corporate news and Xi Jinping’s reassuring shift towards the private sector. The market is now more interested in the innovative capacity of Chinese companies than in macroeconomic issues, which we believe are already priced in.
Finally, while the current trade tensions are a source of volatility, they raise questions about the end of American exceptionalism and argue for greater diversification in equity portfolios. This should particularly benefit China, which is currently under-represented among global investors.