The Resurgence of Chinese Equities: A Strategic Re-Rating Amid U.S.-China Trade Thaw and AI-Driven Earnings Outlooks

The Chinese equity market is undergoing a strategic re-rating, driven by a confluence of geopolitical and technological forces. The recent U.S.-China trade thaw, coupled with the explosive growth of AI-driven earnings, has created a compelling case for asset rotation into China’s “new economy” sectors. This re-rating reflects not just a shift in risk appetite but a recalibration of long-term value creation in an era of technological disruption and geopolitical recalibration.

The Trade Thaw: A Stabilizing Force

The temporary extension of the U.S.-China tariff truce until November 2025 has provided a critical buffer for global supply chains and investor sentiment. While U.S. tariffs on Chinese goods remain elevated at 55%, China’s retaliatory tariffs on U.S. imports have been reduced to 10%, signaling a measured de-escalation [1]. This stability has allowed multinational corporations to delay costly supply chain reorientations, preserving capital for innovation. However, the broader trend of U.S. companies scaling back investments in China—down to 48% of firms in 2025 from 80% in 2024—highlights the fragility of this détente [2]. The trade relationship remains a double-edged sword, with secondary issues like China’s purchases of Russian oil and U.S. semiconductor export controls continuing to cast shadows over the negotiations [3].

AI as the Catalyst for Earnings Growth

The most striking development in Chinese equities has been the AI-driven earnings surge across “new economy” sectors. Information technology, healthcare, and communication services have delivered returns of 20–36% year-to-date in 2025, outpacing traditional sectors by a wide margin [4]. This growth is not merely speculative; it is underpinned by tangible operational improvements. For instance, Tencent’s AI-powered ad optimization in WeChat boosted marketing services revenue by 20% year-over-year, while Alibaba’s Quanzhantui platform drove a 12% increase in customer management revenue [5]. Fintech firms like Jiayin Group have also demonstrated AI’s transformative potential, with a 54.6% year-over-year rise in loan facilitation volume and a 53.1% reduction in operating expenses [6].

The Chinese government’s “AI+” strategy—integrating AI into traditional industries like agriculture and manufacturing—further amplifies this trend. The National Social Security Fund has identified AI applications in autonomous taxis and industrial automation as high-potential areas, while corporate investments in AI infrastructure, such as Alibaba’s $52 billion capex plan, signal long-term commitment [7].

Fund Flows and Strategic Rotation

The U.S.-China trade thaw has directly influenced fund flows into AI-driven sectors. The resumption of U.S. EDA software exports in June 2025, for example, has catalyzed renewed investment in semiconductor design and AI infrastructure, with global AI and big data fund assets reaching $38.1 billion by early 2025 [8]. This contrasts sharply with traditional sectors, which have seen only modest inflows despite a 2025 fiscal stimulus package. AI ETFs now dominate U.S. markets, with assets surging 14-fold in two years to $5.5 billion by May 2025 [9].

Risks and Realities

While the AI-driven rally is robust, it is not without risks. Valuation expansion has outpaced fundamental improvements in macroeconomic conditions, raising questions about sustainability [10]. U.S. export controls on advanced chips continue to constrain China’s semiconductor sector, though domestic players like Cambricon and Hygon are gaining traction [11]. Additionally, demographic and consumer confidence challenges persist, limiting the broader economic impact of AI adoption [12].

Strategic Implications for Investors

The current environment demands a nuanced approach to asset allocation. Investors should prioritize sectors where AI integration is both scalable and profitable, such as fintech, autonomous systems, and AI-driven manufacturing. Defensive sectors like utilities and consumer staples, while less volatile, offer limited upside in a high-growth context. The key is to balance exposure to AI’s transformative potential with hedging against geopolitical and regulatory uncertainties.

In conclusion, the resurgence of Chinese equities is not a fleeting rally but a strategic re-rating driven by technological innovation and geopolitical pragmatism. For investors willing to navigate the complexities of this landscape, the opportunities in AI-driven sectors are both compelling and timely.

Source:
[1] US-China Tariff Rates - What Are They Now? [https://www.china-briefing.com/news/us-china-tariff-rates-2025/]
[2] US companies cut investments in China to record lows [https://www.weforum.org/stories/2025/07/tariff-impacts-us-companies-cut-investments-china-record-lows/]
[3] U.S.-China truce extension hangs in the balance as ... [https://www.cnbc.com/2025/08/11/us-china-truce-extension-hangs-in-the-balance-as-deadline-looms-.html]
[4] China markets 2025: AI boost, trade tensions and what's next [https://www.ig.com/en/news-and-trade-ideas/china-eq-outlook-250604]
[5] China's AI-Driven Tech Giants Defying Economic Headwinds [https://www.ainvest.com/news/china-ai-driven-tech-giants-defying-economic-headwinds-2508/]
[6] Jiayin Group's Q2 2025 Results: AI-Driven Growth and Margin Expansion in China's Fintech Sector [https://www.ainvest.com/news/jiayin-group-q2-2025-results-ai-driven-growth-margin-expansion-china-fintech-sector-2508/]
[7] China's $420b social security fund eyes 'AI+' theme in A-shares [https://www.top1000funds.com/2025/08/chinas-420b-social-security-fund-eyes-ai-theme-in-a-shares/]
[8] AI Fund Assets Reach $38B on Record Chinese Inflows [https://www.etf.com/sections/news/ai-fund-assets-reach-38b-record-chinese-inflows]
[9] Global equity funds draw second weekly inflow on AI rally, ... [https://www.reuters.com/world/china/global-markets-flows-graphic-2025-07-11/]
[10] The China equity rally: artificial or intelligent? [https://privatebank.jpmorgan.com/apac/en/insights/markets-and-investing/the-china-equity-rally-artificial-or-intelligent]
[11] China's AI Chip Self-Sufficiency Drive: Geopolitical ... [https://www.ainvest.com/news/china-ai-chip-sufficiency-drive-geopolitical-tailwinds-undervalued-semiconductor-stocks-2508/]
[12] AI innovations and trade tariffs: The outlook for China in 2025 [https://russellinvestments.com/content/ri/us/en/insights/russell-research/2025/02/ai-innovations-and-trade-tariffs-the-outlook-for-china-in-2025.html]