China's manufacturing and service industries occupy a global leadership position, and DeepSeek is more like China's "Sputnik" moment.
Author: Wall Street Watch
After the explosive rise of DeepSeek, what needs to be reassessed is the entire Chinese asset landscape.
In a recent report on February 5, Deutsche Bank expressed optimism, stating that 2025 will be the year China surpasses other countries, predicting that the "valuation discount" of Chinese stocks will disappear, and the bull market in A-shares and Hong Kong stocks will continue and exceed previous highs. Deutsche Bank stated:
2025 is seen as the year the investment community realizes China's leading position in global competition. It is becoming increasingly difficult to deny that Chinese companies offer high cost-performance and quality products in multiple manufacturing and service sectors.
We expect the "valuation discount" of Chinese stocks to disappear, and profitability may exceed expectations due to policy support for consumption and financial liberalization. The bull market in Hong Kong/A-shares began in 2024 and is expected to surpass previous highs in the medium term.
Specifically, Deutsche Bank stated that China's manufacturing and service industries occupy a global leadership position, and DeepSeek is more like China's "Sputnik" moment:
China also leads in sectors such as clothing, textiles, toys, basic electronics, steel, shipbuilding, as well as complex industries like telecommunications equipment, nuclear energy, defense, and high-speed rail. In 2025, China launched the world's first sixth-generation fighter jet and its low-cost artificial intelligence system DeepSeek within a week.
Marc Andreessen referred to the launch of DeepSeek as "the Sputnik moment for artificial intelligence," but it is more like China's Sputnik moment, where Chinese intellectual property is recognized. China is excelling in high value-added sectors and dominating supply chains, expanding at an unprecedented pace.
Deutsche Bank believes that China is now in a position similar to Japan in the early 1980s:
People are beginning to realize that China's current position is not like Japan in 1989, but rather like Japan in the early 1980s, when Japan's value chain was rapidly ascending, providing higher quality products at lower prices while continuously innovating.
Additionally, Deutsche Bank optimistically pointed out that the US-China trade issues may bring positive surprises, and trade and markets are not as closely related:
As Chinese companies continue to solidify their dominance globally, the valuation discount should ultimately turn into a premium. We believe investors will have to quickly shift towards China in the medium term, and it will be difficult to acquire Chinese stocks without driving up prices.
The advantages of Chinese manufacturing are becoming increasingly prominent
In recent years, China's manufacturing advantages on a global scale have become increasingly evident.
Deutsche Bank stated:
From its initial rise in clothing, textiles, and toys to its current dominance in basic electronics, steel, and shipbuilding, the development trajectory of Chinese manufacturing is remarkable. Particularly in the fields of white goods and solar energy, Chinese companies have shown outstanding performance.
Notably, China's rise in complex industries such as telecommunications equipment, nuclear power, defense, and high-speed rail demonstrates its strong technological capabilities. By the end of 2024, China's rapid rise in automobile exports attracted global attention, with its high-performance, attractive-looking, and competitively priced electric vehicles (EVs) successfully entering international markets. In 2025, China launched the world's first sixth-generation fighter jet and the low-cost artificial intelligence system DeepSeek within just a week, marking an important recognition of Chinese intellectual property.
![Deutsche Bank: The "valuation discount" of Chinese stocks will disappear in 2025, and A-shares and Hong Kong stocks will exceed previous highsaicoinimage1](https://static.aicoinstorge.com/attachment/article/20250206/173883326415783.jpg "Deutsche Bank: The "valuation discount" of Chinese stocks will disappear in 2025, and A-shares and Hong Kong stocks will exceed previous highsaicoinimage1")
The strength of Chinese manufacturing can be evidenced by the following aspects:
Export scale: China's merchandise exports are twice that of the United States, contributing 30% of global manufacturing value added.
Patent applications: In 2023, China accounted for nearly half of global patent applications. In the electric vehicle sector, China holds about 70% of the patents, with similar advantages in 5G and 6G telecommunications equipment.
Talent pool: Apart from India, China has more STEM (science, technology, engineering, and mathematics) graduates than any other country in the world.
Industrial clusters: China has created local professional clusters similar to Silicon Valley for key industries and collaborates closely with universities in research.
China is more like Japan in the early 1980s
Deutsche Bank believes that China is more like Japan in the early 1980s:
Japan's growth was achieved by leveraging abundant cheap labor, capital-intensive usage, and productivity improvements. Domestic investment accounted for over 30% of GDP, thanks to a financial repression policy that kept interest rates low. Japan acquired new technologies through joint ventures. Savings accounted for 40% of GDP in the early 1970s, then fell to nearly 30% in the early 1980s. Japan began establishing factories overseas in the 1970s to avoid trade friction, while China has only recently begun to take such actions.
![Deutsche Bank: The "valuation discount" of Chinese stocks will disappear in 2025, and A-shares and Hong Kong stocks will exceed previous highsaicoinimage2](https://static.aicoinstorge.com/attachment/article/20250206/173883326448847.jpg "Deutsche Bank: The "valuation discount" of Chinese stocks will disappear in 2025, and A-shares and Hong Kong stocks will exceed previous highsaicoinimage2")
Deutsche Bank also stated:
A liberalized financial system is helpful for promoting consumption by normalizing interest rates, thereby ending the transfer of funds from depositors to enterprises. This will reduce over-investment and excessive competition, as capital is rationed, which will benefit the return rates of state-owned enterprises. We expect that as state-owned enterprises improve their return rates, there will be a demand to alleviate excessive competition to enhance stock values. We anticipate this will become a key topic in 2025, and this factor will be crucial in driving the bull market.
Moreover, China's economy and exports continue to maintain rapid growth. In 2024, China's exports are expected to grow by 7%, with exports to Brazil, the UAE, and Saudi Arabia increasing by 23%, 19%, and 18%, respectively, and a 13% increase in exports to ASEAN countries along the "Belt and Road." China's exports to ASEAN and BRICS countries now equal the total exports to the United States and the European Union, with market share in these destinations growing by two percentage points annually over the past five years.
The driving forces behind China's economic growth come from several aspects:
Manufacturing advantages: China has world-leading companies in almost every industry and is continuously capturing market share.
The "Belt and Road" initiative: This initiative opens up regions such as Central Asia, West Asia, the Middle East, and North Africa, expanding China's potential market.
Automation leadership: About 70% of industrial robots are installed in China, driving productivity advantages.
Domestic demand potential: Household savings growth has slowed to twice the nominal GDP growth rate, but since 2020, savings have increased by $10 trillion, and it is expected that these savings will flow into consumption and the stock market in the medium term.
US-China trade issues may bring positive surprises; trade and markets are not so closely related
According to previous reports from CCTV News, US President Trump signed an executive order on February 1 to impose a 10% tariff on goods imported from China. However, Deutsche Bank believes that the actual situation may be more favorable than expected. The Trump administration seems to prioritize tactical victories over maintaining ideologically difficult positions.
The launch of DeepSeek has shaken the world's belief that China can be contained. A better approach may be to stimulate business by reducing regulations, providing cheap energy, and lowering barriers to importing intermediate products. It is expected that before the midterm elections, a more trade-friendly stance will ultimately become part of the developing "America First" agenda.
Deutsche Bank's analysis suggests that a quickly reached US-China trade agreement may involve limited tariffs, the removal of some current restrictions, and some large contracts between US and Chinese companies. If this occurs, the Chinese stock market is expected to rise.
A decline in exports may, for a time, actually drive the stock market up. China's dominance in various industries has been achieved through over-investment in many areas. If supply can be restricted, it may benefit stocks and release some capital for domestic consumption.
Overall, Deutsche Bank believes that as Chinese companies continue to solidify their global dominance, investors may need to quickly adjust their strategies and increase their allocation to the Chinese market. It is expected that the Hong Kong/China stock market will continue to lead global markets in the medium term, extending the strong performance of 2024.
We believe global investors often under-allocate to China, just as they avoided fossil fuels a few years ago until the market punished those who made non-market decisions. We see today's fund holdings in China as similar. Investors who favor leading companies with moats cannot ignore that today, Chinese companies possess broad and deep moats, rather than Western companies.
As Chinese companies continue to solidify their global dominance, the valuation discount of the Chinese story seems to ultimately turn into a premium. We believe investors will have to quickly shift towards China in the medium term, and it will be difficult to acquire Chinese stocks without driving up prices. We have been optimistic before, but have been puzzled about what factors would prompt the world to awaken and buy; we believe China's "Sputnik moment" (or dominance in the electric vehicle sector) is that factor.
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