China's AI and Auto Sector Rally: A Strategic Buy Opportunity in an Upgraded Market Outlook

The Chinese stock market is undergoing a quiet revolution, driven by two sectors poised to redefine global technological and industrial landscapes: artificial intelligence (AI) and electric vehicles (EVs). With Citi's recent upgrade of China equities to “overweight,” easing U.S.-China trade tensions, and the normalization of AI chip supply chains, investors are being handed a rare confluence of structural growth themes and regulatory tailwinds. This is not just a market rally—it is a strategic inflection point for high-growth equities.

Structural Growth: AI Breakthroughs and EV Dominance

China's AI sector is no longer a follower but a formidable innovator. DeepSeek's recent launch of a low-cost, high-performance AI model has sparked investor enthusiasm, while tech giants like Alibaba and Tencent have unveiled competitive AI frameworks. These advancements are not isolated but part of a broader government-backed push to establish China as a global AI leader. The National Integrated Computing Network, a state-led initiative to pool computing resources, and the expansion of local AI labs in cities like Hangzhou and Shenzhen, underscore Beijing's commitment to building infrastructure that rivals Silicon Valley.

Meanwhile, the EV sector is outpacing global competitors. In June 2025, China sold 2.1 million vehicles, with new energy vehicles (NEVs) accounting for 52.7% of total sales. BYD's 31.7% market share in NEVs—surpassing Tesla—highlights the dominance of domestic players. Regulatory efforts to temper price wars and stabilize competition are creating a more sustainable environment for innovation, allowing companies like Geely and NIO to scale production without sacrificing profitability.

Regulatory Tailwinds: Policy and Pricing Power

The Chinese government is recalibrating its approach to ensure growth is both robust and resilient. In the AI sector, state-backed investment funds, including an $8.2 billion National AI Industry Investment Fund, are fueling startups and R&D. Local governments are also offering computing vouchers and AI pilot zones to accelerate adoption. For EVs, trade-in programs and infrastructure investments are reducing barriers to adoption, while regulatory nudges aim to prevent destructive pricing strategies.

Citi's upgraded outlook for China's equities is rooted in these dynamics. The firm cites improved earnings, attractive valuations, and a 4.7% GDP growth forecast driven by AI-driven productivity gains. Despite lingering U.S. tariffs, the firm argues that trade tensions are already priced into the market, with potential negotiations acting as a catalyst for further gains.

AI Chip Normalization: A Game Changer

The normalization of AI chip supply chains is a critical turning point. While U.S. export controls have historically constrained access to advanced semiconductors, domestic alternatives like Huawei's Ascend series are gaining traction. The $47 billion National Integrated Circuit Industry Investment Fund is accelerating progress in EUV lithography and multi-patterning, closing the gap with TSMC.

Nvidia's return to the Chinese market—with plans to resume H20 chip deliveries and launch the RTX PRO GPU—adds another layer of momentum. This development not only bolsters AI model training but also validates the long-term viability of China's tech ecosystem.

Investment Case: Timing the Rally

For investors, the case is compelling but selective. Citi's overweight recommendation is underpinned by undervalued sectors with strong earnings trajectories. AI beneficiaries like DeepSeek, Alibaba, and Tencent, alongside EV leaders BYD and Geely, are prime candidates. The Hang Seng Index's 15.4% gain in 2025 (as of June) reflects this momentum, with AI and EV stocks outperforming global peers.

However, risks remain. Trade tensions could flare, and domestic competition could intensify. Yet, these challenges are already factored into valuations, making the current environment favorable for long-term positioning. Structured products with downside protection or diversified portfolios focused on AI-driven innovation can mitigate risks while capitalizing on growth.

Conclusion: A Window of Opportunity

China's AI and auto sectors are at a pivotal juncture. The combination of structural growth, regulatory support, and supply-side normalization is creating a fertile ground for high-growth equities. While caution is warranted, the current market environment offers a rare opportunity to align with sectors that are not only resilient but also redefining global innovation. For investors with a medium-term horizon, the time to act is now—before the next wave of AI breakthroughs and EV dominance solidifies into a new market consensus.