“China’s equity markets, including the Shanghai and Shenzhen exchanges, have historically traded at discounts compared to global peers due to regulatory uncertainties and geopolitical tensions. However, recent technological advancements, notably DeepSeek’s AI breakthrough, have spurred a reevaluation of growth prospects. This report examines how AI-driven productivity gains, government support, and sectoral transformations are driving a rerating of Chinese equities. ”

DeepSeek’s breakthrough centers on a scalable AI architecture optimized for industrial automation and data analytics, enhancing efficiency across sectors. 

Key innovations include: 

- Adaptive Machine Learning Algorithms: Reducing computational costs by 40% while improving accuracy in predictive tasks.

- Cross-Industry Applications: The low-cost large models and their wide-ranging application scenarios will accelerate the development of AI applications across various industries in China. This is expected to significantly enhance China's productivity and potential GDP growth. We are optimistic about the vast application opportunities for AI in the manufacturing, internet, financial, and pharmaceutical sectors. 

- Government Endorsement: Aligned with China’s “AI 2030” plan, prioritizing selfsufficiencyin critical technologies. 

This advancement positions China to compete globally in AI, attracting investor attention to domestic tech firms. 

Sectoral Impact Analysis

Firstly, driven by low-cost open-source large models, internet companies are experiencing accelerated growth in sectors such as advertising, gaming, and retail. Their valuations are highly competitive compared to international peers, with stock prices generally increasing by 20% to 50% at the beginning of the year. 

It is anticipated that the deployment of large models on mobile devices will accelerate, particularly with the release of new iPhones starting in the second half of this year, which is expected to drive smartphone sales and benefit the Chinese supply chain. Additionally, Chinese smartphone manufacturer Xiaomi is poised to gain significantly from the future deployment of large models in mobile and IoT applications, with related stocks generally rising over 30% since the beginning of the year. 

Smart vehicles are expected to significantly increase their penetration rate: BYD plans to deploy smart driving systems across 80% of its automotive business this year. Moreover, the deployment of AI large models will enhance the capabilities of domestic automobile manufacturers in autonomous driving software. Companies like BYD have also seen their stock prices rise by over 20% since the beginning of the year. 

Humanoid robots are on the verge of large-scale production, with Tesla's humanoid robot set to begin mass manufacturing this year. The production supply chain is primarily located in China, and companies within this supply chain are expected to greatly benefit from the rapid development of humanoid robots. The growth potential for humanoid robots is substantial, and their profitability is projected to outstrip that of traditional manufacturing industries. Corresponding domestic companies have seen stock price increases of over 40% since the start of the year. 

China boasts a wealth of AI application scenarios, with over 40% of global manufacturing capacity located in the country and a population of 1.4 billion. There is significant growth potential for AI business opportunities in both B2B and B2C sectors. More importantly, Chinese companies excel at cost-effectively implementing AI transformations across various industries, a capability that is among the best in the world. 

Policy Analysis

The meeting between China's top leaders and private enterprises in sectors like technology and the internet is a significant signal. It indicates a shift in China's political focus towards more support for private businesses and greater emphasis on the economy. It also confirms that the most important direction for future development is AI-related advanced technology. 

Valuation and liquidity

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- Valuation Metrics: MSCI China traded at 11.2x PE of 2025 and still at lower level versus the global peers. 

- Foreign Investment:  Foreign investors continue to underweight their investments in China, particularly larger long-only investors. 

Policy and Regulatory Considerations 

- Supportive Measures: Tax incentives for R&D and more than $10B AI investment fund. 

- Global Competition: U.S. export controls on semiconductors pose challenges, though domestic chipmakers (e.g., SMIC) benefit from substitution demand. 

Challenges and Risks

- Overvaluation: Some AI stocks trade at 50x EBITDA, raising bubble concerns. 

- Implementation Hurdles:  SMEs face high adoption costs, risking a bifurcated market. 

- Geopolitics: U.S.-China tech decoupling could limit international collaboration. 

Conclusion and Future Outlook

DeepSeek’s AI breakthrough has been a pivotal catalyst for rerating China’s equity market, with tech sectors leading gains. While policy support and productivity gains underpin sustained growth, investors must navigate risks of volatility and regulatory shifts. Longtermsuccess hinges on scalable AI integration and global competitiveness.