Transformation, renewal and growth: The case for Asian technology in the Year of the Snake

It has been difficult to make a strong case for investing in Chinese equities in recent years.

The market has fallen from its peak in early 2021 as the economy continues to slow down post-Covid, the property market remains highly indebted, and domestic consumption remains weak.

Whilst these are genuine economic challenges, there are also reasons to believe that things may be turning. Last September, large monetary and fiscal stimulus measures were announced, demonstrating that China would do whatever it takes to prop up the economy and restore investor confidence.

And with remarkable technological advancements in AI over recent weeks, the setup for Asian technology companies looks promising in the Year of the Snake.

Why is China’s economy struggling to grow?

China’s economy grew just 5% in 2024¹, a long way off the double-digit growth rates it achieved throughout the early 2000s from large-scale industrialisation. However, whilst this investment-driven growth model worked well in the past, it may present challenges moving forward.

Years of overinvestment in sectors like real estate, infrastructure, and manufacturing were fueled by easy credit access and Beijing’s ambition to rapidly expand the economy. Whilst this strategy was initially effective, it resulted in inefficient capital allocation, as investments were made by state owned enterprises with little pressure to maximise profits, and a build-up of debt levels.

This has exposed China to significant macroeconomic imbalances and vulnerabilities to downside growth shocks as noted by Janet Yellen who expressed her concern for during a press conference in Beijing in April 2024.

Source: Bloomberg, National Bureau of Statistics China. Quarterly data from Q1 2016 to Q3 2024.

Weak household consumption has also held the economy back. With around 70% of Chinese wealth tied to property², falling property prices have contributed to weak levels of consumer confidence and in turn suppressed the consumption component of GDP.

A turning point for Chinese equities?

With negative sentiment priced into Chinese equities and a strong willingness from the Politburo to put a floor under further economic weakness, there may be three reasons why investors should reconsider their exposures to the world’s second largest economy.

1. Valuations present an attractive entry point

With the MSCI China Index trading at just 11.4x price to earnings (P/E) at time of writing, Chinese equities may present an attractive entry point for many investors. Meanwhile other indices like the S&P 500 are trading at record levels of valuation.

Source: Bloomberg, Betashares. As at 7 February 2025. Past performance is not an indicator of future performance.

Whilst largely a reflection of the pessimistic outlook that the Chinese economy is facing, it’s worth noting that the most attractive investment opportunities often present themselves when sentiment is extremely weak. Any incremental positive development (such as expansionary policy measures) can quickly shift the prevailing narrative.

2. The policy environment should be supportive of the economy

Despite piecemeal support measures being ‘drip fed’ over recent years, the policy environment may be different this time as domestic weakness has become uncomfortable for China’s top policymakers. The recent announcement of US tariffs on Chinese imports adds additional urgency for the policy mix to be implemented swiftly and effectively.

Following the first round of stimulus packages announced in September last year, China adopted a “moderately loose” monetary policy stance in December which it last adopted in late 2008 after the global financial crisis. This strategy aims to ease credit conditions and inject liquidity into the economy.

And just weeks ago on January 23rd, China announced measures for state owned insurers like Ping An Insurance and China Life Insurance Company to invest 30% of new annual premiums in A-shares (stocks from companies incorporated in mainland China that trade on the Shanghai or Shenzhen stock exchanges)³. Mutual funds are also encouraged to increase their A-share holdings’ tradeable market value by at least 10% annually over the next three years.

Whilst the full impact of these measures are yet to materialise, they demonstrate a strong willingness by Chinese policymakers to put a floor under any further deterioration in the economy as we head into the ‘two sessions’ meeting in March.

3. AI leadership – China’s strategic priority

Becoming a world class leader in technology has become a national imperative for China as the country shifts away from legacy industries like real estate and infrastructure. Instead, investments are now being directed into new ‘high-tech’ areas of the economy such as electric vehicles, semiconductors and AI.

DeepSeek’s groundbreaking release of a cheaper and more efficient AI model sent shockwaves throughout markets, and challenged US pre-eminence in AI for the first time. Since then, Alibaba and Bytedance have both released their own AI models which they claim surpass Deepseek and OpenAI’s o1 model.

However, this is no overnight success story. In 2016 a DeepMind AI model defeated the world champion of the world’s most complex board game, Go. In response, President Xi Jinping declared that AI was a technology where China had to establish leadership. He designated five companies to be China’s AI national champions including Alibaba, Baidu and Tencent. And from that point Chinese investment and patent activity in AI has skyrocketed.

Exploring the broader investment opportunity set in Asian technology

Whilst the Chinese technology sector is again becoming an area of interest for investors, it’s worth noting that there is a broader semiconductor supply chain that includes foundries, memory chip providers and component manufacturers – many located in Asian nations.

For example, whilst investors may be familiar with Nvidia’s customer base (i.e., the group of Magnificent 7 companies), many of Nvidia’s suppliers are located in countries such as Taiwan and South Korea.

Source: Bloomberg, Betashares. As at 7 February 2025.

Below we look at some examples of leading companies within this space:

Taiwan – TSMC

Taiwan Semiconductor (TSMC) is the world’s largest manufacturer of advanced semiconductor chips which are required for building and developing artificial intelligence (AI) applications. Nvidia’s Blackwell B200 chip uses TSMC’s 4NP manufacturing capabilities to scale production.

South Korea – Samsung and SK Hynix

AI applications require both a logic chip (to perform calculations) and a memory chip (to store data) – just like a human has part of the brain that processes information and another to access memory quickly.

South Korea is home to two of the largest memory chip manufacturers, Samsung and SK Hynix. These two companies combined account for almost 70% of dynamic random access memory (DRAM) chip production⁴ – a critical component in advanced GPUs.

Conclusion

Alibaba, TSMC, Samsung and SK Hynix are all key holdings held within the ASIA Asia Technology Tigers ETF  which provides investors exposure to a portfolio of companies crucial to the semiconductor supply chain and leveraged to any consumption led recovery in China⁵.

ASIA returned 43% over the year ending 31 January 2025, and returned 9.4% p.a. over the last 5 years⁶, outperforming most global market indices⁷.

Chinese equities have been unloved for some time; however, we may be at a turning point with suppressed valuations providing an attractive entry point. Tech companies from China and greater Asia provide another way to participate in the AI revolution, without the valuation premium attached to the Magnificent 7.

With many investors currently underweight Asian equities, now might be the time to re-think portfolio allocations to this dynamic region.

References:

1. https://www.cnbc.com/2025/01/17/china-gdp-growth-meets-market-and-government-estimates.html ↑

2. https://www.china-briefing.com/news/explainer-whats-going-on-in-chinas-property-market/ ↑

3. https://www.reuters.com/markets/asia/china-guide-billions-dollars-insurance-money-into-stocks-2025-01-23/ ↑

4. https://www.chosun.com/english/industry-en/2024/02/29/SGS2LHTAAJAIHBDRMMJLBHGSFA/#:~:text=Samsung%20Electronics%20and%20SK%20Hynix%20account%20for%20almost%2070%25%20of,the%20matter%20on%20Feb.%2029 ↑

5. Alibaba, TSMC, Samsung and SK Hynix are currently included in ASIA’s portfolio. No assurance is given that these companies will remain in ASIA’s portfolio or will be profitable investments. ↑

6. Source: Bloomberg. Past performance is not indicative of future returns. ASIA’s returns are net of management costs of 0.67% p.a. ASIA’s inception date was 18 September 2018. You cannot invest directly in an index. ↑

7. ASIA’s returns can be expected to be more volatile (ie vary up and down) than a broad global exposure. ↑