Navigating China's Industrial Decline: Finding Value in Resilient Sectors

The first half of 2025 has seen China's industrial sector struggle with a 9.1% year-on-year profit decline in May—the worst since October 2024—amid U.S. tariffs, deflation, and overcapacity. While traditional sectors like automotive and real estate falter, a handful of industries are proving resilient, offering investors a path to outperform in a challenging environment.

The Crisis in China's Industrial Heartland
The data paints a grim picture. Cumulative industrial profits for the first five months of 2025 fell 1.1% compared to 2024, with manufacturing profits dropping 7.4% and auto dealers collapsing under price wars. Real estate development investment slumped 10.7%, dragging down fixed-asset investment. Meanwhile, deflationary pressures are mounting: the Producer Price Index (PPI) fell 3.3% year-on-year in May, while consumer prices dipped 0.1%.

But not all sectors are suffering. High-tech manufacturing, equipment industries, and services are defying the gloom. Here's why—and how investors can capitalize.

Sector Spotlight: High-Tech Manufacturing
High-tech manufacturing profits surged 8.6% in the first five months of 2025, outpacing the broader industrial sector. Sub-sectors like 3D printing (40% growth), industrial robots (35.5% growth), and new energy vehicles (NEVs, 31.7% growth) are leading the charge. These industries benefit from government subsidies, domestic demand for tech upgrades, and global supply chain shifts as firms “China+1” strategies push production to Southeast Asia, favoring advanced machinery and robotics.

Why It's Resilient:
- Structural Tailwinds: Beijing's “self-reliance” push prioritizes semiconductor, AI, and green tech.
- Global Demand: EVs and robotics are critical to decarbonization and automation trends.
- Deflation Immunity: These sectors often have pricing power due to proprietary tech and rising demand.

Investment Play:
- ETFs: Consider sector-specific funds like the KraneShares CSI China Artificial Intelligence ETF (KAIN) or the iShares MSCI China A Tech ETF (CITE).
- Stocks: Look for companies with exposure to industrial automation (e.g., Midea Group in robotics) or advanced materials (e.g., Shenzhen TCT in 3D printing).

The Services Sector's Quiet Boom
While manufacturing flounders, the services sector grew 6.2% in May, fueled by IT, logistics, and professional services. Digital transformation and e-commerce are driving demand for cloud infrastructure and logistics networks. For instance, wholesale/retail trade services rose 8.4%, while IT services jumped 11.2%.

Why It's Resilient:
- Domestic Consumption: Retail sales hit 6.4% growth in May—the fastest since late 2023—as subsidies boosted spending on appliances and tech.
- Supply Chain Shifts: Companies moving production to ASEAN are boosting cross-border logistics demand.

Investment Play:
- Logistics: Companies like ZTO Express or Cainiao Logistics (Alibaba's arm) benefit from trade diversification.
- Tech Services: Firms offering cloud solutions (e.g., Tencent Cloud) or cybersecurity (e.g., 360 Security) are critical to China's digital economy.

Defensive Plays: Utilities and Infrastructure
While mining profits collapsed 26.8% through April, utilities grew 4.4%, offering a stable income stream. Meanwhile, infrastructure projects—backed by government spending—are driving demand for construction equipment. Excavator sales rose 23.8% in Q1 2025, signaling renewed investment in roads and rail.

Why They Matter:
- Policy Backing: Beijing's focus on “new infrastructure” (5G, EV charging) ensures steady demand.
- Low Volatility: Utilities and infrastructure stocks provide ballast in a volatile market.

Investment Play:
- ETFs: The iShares China Infrastructure ETF (CHXX) tracks firms in construction and utilities.
- Utilities: China Resources Power or State Grid Corporation offer dividend stability.

Risks and Caveats
- Trade Tensions: U.S. tariffs remain a wildcard. Sectors reliant on U.S. exports (e.g., semiconductors) face headwinds.
- Data Quality: Official stats may overstate resilience; monitor independent metrics like electricity use or tax receipts.
- Valuation: Some high-growth sectors (e.g., EVs) are pricey—seek companies with strong cash flow.

Conclusion: A Selective Play in China's Tech and Services Future
China's industrial decline is far from uniform. Investors should avoid traditional sectors crushed by deflation and tariffs, focusing instead on high-tech manufacturing, logistics, and digital services. These areas are not only weathering the storm but are positioned to benefit from long-term trends like automation, decarbonization, and trade diversification.

The key is to pick winners with strong balance sheets and government support, while staying wary of overvaluation. In a world of slowing growth, resilience—and the sectors that embody it—are the ultimate value plays.