China is redefining the bounds of innovation

Business Times

a day ago

IN recent years, China's technology sector has been somewhat eclipsed by domestic economic challenges and geopolitical tensions abroad. Specifically, since 2022, the swift advancements in artificial intelligence (AI) within the US and the imposition of chip export bans on China have raised concerns about potential technological limitations for China, with fears that major US tech companies might outspend competitors to establish a technological monopoly.
However, early 2025 was a turning point when the world was taken by surprise by a significant breakthrough from DeepSeek.
DeepSeek's models have demonstrated impressive performance by integrating reinforcement learning for post-training with chain-of-thought reasoning. Notably, these achievements come at a fraction of the cost of pioneering models, while maintaining a narrow performance gap.
A significant benefit to the entire AI community is that DeepSeek's models are open source, accessible to anyone globally. DeepSeek's success underscores the adage that necessity is the mother of innovation, highlighting China's inherent structural advantages in research and development, talent and data, among others, to drive innovation despite chip restrictions. This has prompted a reassessment of structural investment opportunities within China's tech sector.
In recent months, the situation has become more complex due to sweeping US tariffs. Although these tariffs are temporarily paused, they still result in higher costs than before for the global tech sector. Many Chinese tech companies have diversified their market exposure by selling more to non-US markets and expanding their production footprint outside China, actions taken since the last trade war during US President Donald Trump's first term.
In the short term, companies facing new tariff measures may attempt to pass these costs on to end customers. If a company possesses strong bargaining power or operates within a resilient sector where customers are less sensitive to price increases, the pass-through process will likely be smoother.
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In the longer term, we are likely to see continued supply chain diversification, driven by initiatives such as 'China +1,' where companies establish capacities outside China, particularly for goods exported to the US. Meanwhile, tariffs are part of the broader US-China strategic competition. In strategic sectors such as semiconductors and AI, we can expect accelerated technology localisation in China.
Along the semiconductor supply chain, self-sufficiency remains low in areas such as semiconductor equipment, advanced materials and fabless operations. As suppliers in China enhance their technologies and broaden their product ranges, Chinese customers are increasingly adopting local solutions – often at the expense of global suppliers, driven by concerns over supply chain disruption.
In the realm of AI, China's AI ecosystem might evolve into a more closed loop, with greater localisation of both software and hardware.
As AI technology becomes more affordable and powerful, its adoption in China is rapidly increasing. In the realm of enterprise applications, AI has demonstrated its ability to improve digital advertising conversion rates, and is being integrated into enterprise software to boost productivity and customisation.
On the consumer side, various AI chatbots, such as DeepSeek, Tencent's Yuanbao and ByteDance's Doubao, are flourishing, while AI-enhanced learning devices offer highly customised and targeted learning experiences. Additionally, utilising more sophisticated large language models to distill and train smaller models enables lower inference costs and more effective AI deployment on edge devices such as PCs, smartphones and cars.
Overall, there are compelling investment opportunities within China's technology sector. While the sector's broad valuation remains below historical average levels, a selective approach is still necessary. We seek opportunities in AI applications that benefit from more affordable AI, such as select software companies that now integrate AI into their offerings to enhance performance while remaining cost-effective.
Domestic technology substitution in semiconductor equipment and fabless design areas is also worth monitoring. From a cyclical perspective, aside from AI, the general tech sector has experienced a relatively slow recovery. Some sub-segments, such as analogue and PC stocks, have not participated in the previous AI rally and present interesting prospects.
The writer is portfolio manager, Fidelity International