Concerns about tariffs have stirred up global investors, but there’s continued optimism in China’s tech sector, especially with the burgeoning interest in generative AI technologies developed locally. The recent U.S. tariffs targeting China and its Southeast Asia partners initially caused Chinese stock markets to nosedive on Thursday, but they managed to climb back up significantly before closing. It’s worth noting that local markets remained shut on Friday due to a public holiday.
Kai Wang, an Asia equity strategist at Morningstar, addressed these fluctuations by highlighting that most major Chinese tech and consumer companies have limited dealings with the U.S. Despite some initial panic, he noted potential interventions in fiscal policy if macroeconomic conditions deteriorate further. Last month, China’s finance ministry signaled having reserves ready for uncertainties both domestically and abroad, with policymakers scheduled to convene for a regular meeting later this month.
In a recent report, Citi China equity strategist Pierre Lau and his team observed that Chinese tech stocks remain attractively priced compared to their U.S. counterparts. For instance, seven leading Chinese tech companies are currently trading at price-to-earnings ratios that are 52% lower than that of the U.S. “Magnificent Seven,” a figure yet to reach its historical norm of a 33% discount over the past five years.
Amid the tariff uncertainties, Citi’s strategists are favoring domestic markets over exports and are inclined towards service sectors over goods. Their aim is on growth sectors rather than value stocks, placing significant emphasis on China’s internet, technology, and transportation markets. Among their recommended buys are Tencent, BYD, and Haier, all captains of industry listed in Hong Kong.
Investor interest in Chinese tech has been noticeably rising, with nearly a quarter of international investors showing increased positivity, according to Citi’s U.S. marketing observations in recent months. Data from EPFR indicates that allocations to China by global emerging market equity funds reached their peak in 16 months by late March. This enthusiasm is mirrored in ventures like the Chinese startup DeepSeek, which claims its AI surpasses OpenAI’s ChatGPT, despite American restrictions on advanced chip access needed for AI training.
Chinese companies are expected to benefit from AI through cost reductions, while policy initiatives aim to bolster consumer growth. HSBC analysts observed that upward adjustments in earnings forecasts are primarily fueled by high-tech and select consumer companies. On Thursday, an index tracking ten major Chinese tech firms traded in Hong Kong fell by 1.2%, faring better compared to the Hang Seng index’s 1.5% decline. Year-to-date, the tech index is over 20% higher, outpacing Hang Seng which rose by just under 14%.
Alternatively, the Chinese healthcare sector seems insulated from the tariff repercussions, especially since pharmaceuticals escaped the latest levy list from the U.S. administration. Jefferies equity analyst Cui Cui pointed out that most Chinese biotechs have partnerships in the U.S., categorizing them as non-exporters, thus shielding them from tariff impacts. Additionally, the reintroduction of legislation like the expired Biosecure Act seems unlikely in the near term, which historically aimed to limit federal contracts for companies like Wuxi Biologics.
As the political landscape continues supporting lower drug prices, Jefferies analysts indicate that companies like Wuxi Biologics have a considerable efficiency edge over firms such as Samsung Bio and Lonza. Anticipating “accelerated and profitable growth by 2025,” Wuxi Biologics earned a buy rating from Jefferies in late March.
However, the broad scope of the new tariffs and their exact impact on China’s economy are still uncertain. Morningstar’s Wang issued a caution, acknowledging that while the tech sector might face indirect impacts due to potential GDP impacts and increased market volatility, the overall tech realm remains somewhat resilient.
