AI Revolution to Drive $200 Billion Capital Inflow into China's Stock Market, Says Goldman Sachs

Recent analysis by Goldman Sachs has highlighted the potential impact of artificial intelligence (AI) on China's stock market, forecasting a significant boost in investments. The firm suggests that widespread adoption of AI could increase China's corporate earnings per share by 2.5% annually over the next decade. This optimistic outlook on growth and increased confidence could raise fair valuations of Chinese equities by 15-20%, potentially attracting over $200 billion in capital inflows, with southbound funds contributing approximately $104 billion.

The emergence of the DeepSeek-R1 model, among other globally competitive and cost-effective Chinese AI technologies, is reshaping the narrative surrounding Chinese equities. In the past month, DeepSeek has notably influenced a 27% and 19% rise in the Hang Seng Tech Index and MSCI China Index, respectively. This follows the trajectory seen in the U.S., where AI developments have substantially driven market gains since the advent of ChatGPT.

Goldman Sachs has revised its 12-month targets for the MSCI China and CSI 300 indices to 85 and 4700, indicating potential increases of 16% and 19%, respectively. This projection emphasizes the dual enhancement of profitability and valuations driven by AI. AI technologies are expected to influence three main aspects of corporate profitability in China: productivity improvements, cost-efficiency optimization, and the emergence of new revenue opportunities.

The productivity surge, potentially contributing to a cumulative 9% boost in productivity over the next decade, could enhance the annual earnings growth of MSCI China constituents by 1.1%. Meanwhile, cost-effectiveness through labor optimization could reduce costs by 3% annually, thereby increasing overall profits by 1.8% each year. Additionally, the creation of new business models and incremental value from AI is anticipated to generate 1% annual revenue growth.

Financial experts assert that the momentum provided by AI, similar to the U.S. experience, has already begun to attract substantial inflows into the Chinese stock market. Hedge funds are increasing their net exposure to China, while southbound investors are actively acquiring Chinese technology stocks listed in Hong Kong. If China's market capitalization grows by $3 trillion in the next 12 months, as suggested by Goldman Sachs, AI could entice up to $200 billion in net purchases, potentially reversing the under-allocation of global asset managers towards Chinese stocks.