On Dec 23, I posted my last piece on our China trip (Ten Days In China (2): Who got a plan?). Part 1 was about Housing, then Bots On The Ground (Robotics) and Shhh… (cars).
This is the conclusion.
We went to China to better understand what is making China so dominant in key tech sectors and whether these conditions would remain in future years.
Today’s Chinese economy is not Centrally Planned in the communist way.
China was Centrally Planned during the Mao period (1949-1978), but not before nor after.
China today, unlike its Centrally Planned Mao period, not only has private enterprise but its local governments, provinces, and cities are corporatist entities. This “mayor economy” is an ancient Chinese characteristic. This is how things functioned under past dynasties for centuries. It is wrongly attributed to communism.
As an investor, I don’t have to agree or support any model. But I must understand and appreciate all models, find which one works best, why, whether it’s sustainable, and how this will influence future investment returns.
Based on recent history (solar, batteries, EVs, robotics and, increasingly, AI and biotech), the Chinese model is outperforming. So far in the Trump 2.0 years, I unfortunately can’t see much evidence that this is about to change.
Still, China needs to sustain a structurally high growth rate to attain its targeted middle-to-high income status by 2035. This implies average real growth of 4.5%
during its current Five-Year Plan.
Its manufacturing capabilities and dominance in key tech sectors must continue in order to offset several headwinds, many being structural:
- Its transition to a sustainable, consumption-led growth model is hampered by a moribund, wealth destroying, housing sector and by a still savings-minded population favoring services over goods.
- China will thus continue to produce and export goods that it can’t domestically absorb, keeping world prices low, but with continued frictions with its trade partners.
- Its rapid adoption of robotics is good for exports but creates employment challenges within China’s own manufacturing industries. KKR estimates that even assuming 4% annual GDP growth, China’s productivity gains could reduce secondary-sector jobs by 90-100 million over the next decade, reducing their share of total employment from 29% to 17%. These workers will need to be displaced towards service-producing jobs implying that China must rapidly grow this side of its economy which currently accounts for 56.7% of GDP vs a global average of 66.3% per KKR numbers.
- Financial services and healthcare employment could rise significantly if China sets up adequate safety nets (income security, social and healthcare insurance). The 14th Five‑Year Plan (2021‑2025) explicitly committed to expanding China’s social safety net, with a particular focus on universalizing and upgrading basic medical insurance, improving protection against catastrophic illness, and strengthening public‑health and primary‑care systems. Beijing acknowledges that “the safety net remains incomplete”. Party and State Council documents framing the emerging 15th FYP (2026-30) stress “common prosperity” and a stronger safety net as a co‑equal pillar with tech upgrading and green development. Importantly, the recommendations highlight extending social‑security coverage to migrant workers (~175 million), flexibly employed workers, and those in “new forms of employment,” and improving portability of social‑security accounts across regions.
- Youth unemployment, already high, will be a critical challenge for Beijing.
- China’s inflation rate remains uncomfortably near deflation.
McKinsey built this spending metrics table that clearly shows Chinese propensity to spend on services and experiences, leaving much of the goods China manufactures for exports.
Goldman Sachs:
With domestic demand still suffering from the weakness in the property market, the government’s apparent determination to double down on export-led growth to hit its growth targets is likely to expand China’s current account surplus to 1% of global GDP by 2029.
This would be the highest level on record in any single economy, eclipsing the United States in the late 1940s. The implication is a hit to manufacturing output and employment in China’s trading partners, often dubbed China Shock 2.0.
The increase in German government spending has started, and we expect GDP growth to accelerate to the 1-1.5% range in the next couple of years. However, these numbers represent a downgrade to our previous forecast. This is partly because of China Shock 2.0, which looks set to weigh heavily on the global demand for Germany’s industrial output.
Who could have thought?
China’s innovation ecosystem remains a key offset to cyclical and structural headwinds.
Meanwhile, at the corporate level, China’s leading internet platforms are taking a decidedly more disciplined approach than many U.S. hyperscalers, favoring pragmatic, cost-efficient models over large-scale capital outlays. This year, firms such as Tencent and Alibaba are running capex-to-revenue ratios of roughly eight percent, versus 20% or more for many U.S. peers.
In our view, semiconductor restrictions have, somewhat counterintuitively, reinforced this capital efficiency by pushing Chinese companies to innovate around lower-cost model performance rather than relying on heavy hardware spending. This strategy keeps China competitive in many AI applications without matching U.S.-style capital intensity.
At the same time, it also implies that AI’s ultimate contribution to GDP growth in China may be more modest than in economies pursuing more aggressive investment strategies, even as it remains an important incremental tailwind to the broader growth story. (KKR)
US top hyperscalers are engaged in a spending stampede to achieve AI dominance without proven business models. Surely, there will be blood, particularly if low costs Chinese models find their way abroad. There is already some evidence of that.
(KKR)
Investing in China looks smarter if focused on its tech winners and on services rather than using broader vehicles. if you don’t care Chinese stocks, you should still keep track of its tech winners. They could very well hurt yours.