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1、5 February 2025Chinas,not AIs,Sputnik momentWe think 2025 is the year the investing world realizes China is outcompeting the rest of the world.Its becoming impossible to not acknowledge that its corporates are delivering superior value for money,and often superior quality,across multiple spheres of

2、manufacturing and increasingly services too.Investors pay for dominance,and we expect the China discount to disappear.Furthermore,we believe profitability can surprise to the upside through the cycle,due to policy swings to favour consumption over production,and potentially from financial liberaliza

3、tion.We believe the bull market for HK/CH equities began in 2024,and will exceed prior highs in the medium term.China first rose to global corporate dominance in clothing,textiles,and toys.It then dominated in basic electronics,steel,shipbuilding,and more recently,white goods,solar,and other less gl

4、amorous areas.And it came out of nowhere to dominate industries as complex as telecom equipment,nuclear power,defense,and high-speed rail.Its technological achievements have been discounted by investors.But by late 2024 China received attention for its rapid ascension to lead the world in auto expor

5、ts,with it flooding the world with high functioning,attractive EVs at prices far below equivalent existing models.This gained the worlds attention.And in 2025,China in one week launched the worlds first sixth generation fighter plane and its low-cost AI system,DeepSeek.Marc Andreessen referred to De

6、epSeeks launch as AIs Sputnik moment,but it is more Chinas Sputnik moment,where China IP gets recognised.The list of high value-add areas China excels in,and dominates the supply chain in,is expanding at a pace without precedence.We consider global investors tend to be heavily underweight China,just

7、 as they were avoiding fossil fuels several years ago-until the market punished those taking non-market based decisions.We see parallels with funds minimal exposure to China today.Investors that like leading companies,with moats,cannot ignore that it is Chinas firms that have the wide and deep moats

8、 today,rather than the Western Peter Milliken,CFAResearch Analyst+852-2203 6190Deutsche Bank AG/Hong KongIMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1.Deutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors should be

9、 aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.Deutsche BankResearch Asia China Hong Kong Strategy China Equity Strategy Date Strategy Update China

10、 eats the worldDistributed on:05/02/2025 14:03:06 GMT7T2se3r0Ot6kwoPa5 February 2025China Equity StrategyPage 2Deutsche Bank AG/Hong Kongcompanies they are economically superior to.Chinas manufacturing strength is obvious,with double the exports of merchandise than the US.It delivers 30%of global ma

11、nufacturing value add,and its also rising rapidly in services share.People avoid China as an investment destination,citing its economic weakness,yet it still grows at more than double the rate of most developed markets,despite a cyclical slowdown.With world-leading companies that are taking share ac

12、ross almost every industry,it likely will not remain as a single-digit percentage of global market cap for long.We believe it is dawning on people that China is where Japan was,not in 1989,as they perhaps thought,but in the early 1980s,when the Japanese were climbing up the value-add ladder rapidly,

13、with better-quality products at lower prices,and with innovations coming through.The West has to grapple with a potential extinction event for many of its companies and industries,so will need to reposition their holdings to reflect this.To survive,its corporates will need to:1)Massively automate,an

14、d/or 2)Erect trade barriers.The second route has been a downward path for economies in the past,and while it is happening,it doesnt necessarily help the West,as in autos for example,the major export markets for China tend to be the approximately 7bn people not in the G10.Figure 1:Global trade in man

15、ufactured productsSource:WTO,World Trade Statistical Review,2023Figure 2:Chinas export shareSource:WTO,World Trade Statistical Review,2023Looking at the major categories of international trade,China has been taking share in all(but clothing,which it had dominated,before expanding operations offshore

16、).It is larger than the US in the key merchandise categories,and routinely many times larger.The exception has been autos(now we are talking value not volume)-but is likely already ahead there too-and with Fords CEO driving a Xiaomi,its hard to see the trend changing.Even on services,China has been

17、catching up,adding about 0.5 points share p.a.on transport for example.5 February 2025China Equity StrategyDeutsche Bank AG/Hong KongPage 3Figure 3:Export market share by major categorySource:WTO,World Trade Statistical Review,2023*Excludes intra-Europe tradePatents as proxy for IPChina brings the f

18、ull value chain,and creates local clusters of expertise,with multiple Silicon Valley like areas of expertise for key industries,and aligns well with its universities in research.In the EV sector,China owns around 70%of patents,and 5G and 6G telecom equipment is similarly positioned.China accounted f

19、or nearly half of all patents applied for during 2023.With more STEM graduates than the rest of the world ex India,thats likely to continue.Also consider that many graduates in those other countries are Chinese too.So the rise in Chinas corporate dominance will likely not be stopped anytime soon,wit

20、hout exceptional circumstances occurring.China does face trade barriers,with the US and EU tariffs on EV vehicles being an obvious example,but the West is limited in what it can do without paying for consequences that are perhaps worse(e.g.,inflation,falling competitiveness,and retaliation).The US a

21、ttempted to hold Japan back in the 1980s,to some success,but we think China is not where Japan was in 1989,but years earlier.Figure 4:Patents filed(2023)Source:World Intellectual Property Organization5 February 2025China Equity StrategyPage 4Deutsche Bank AG/Hong KongChina vs.Japan 1980sThroughout t

22、he 1970s,Japan had the second largest GNP,just behind the US,and when consulting with Wikipedia,we were surprised to realize its real GDP growth averaged just 4%in the 1980s,and that was still considered a large part of its economic miracle.Compare that to the angst today over whether China will gro

23、w at 4%or 5%,and that is criticized as slow now,but this view may evolve towards it being a miracle in hindsight.The Plaza Accord mandated a 40%yen strengthening,slowing Japans industrial lead.That led to a slowdown that the government dealt with by a loose monetary policy.Growth then revived in 198

24、7-89 to 5%,and that period was associated with strong equity gains as bubble conditions occurred.The pick up in growth caused steel and construction to revive,and lifted salaries and employment.Domestic demand,rather than exports,was the economic driver in the late 1980s.This could become the case i

25、n China too.Japan in the 1980sParaphrasing Wikipedia,Japans growth was achieved through deploying abundant cheap labour,and intensive use of capital,along with productivity gains.Domestic investment was more than 30%of GDP,helped by financial repression that kept interest rates low.Japan acquired ne

26、w technologies by JVs.Savings reached 40%of GDP in the early 1970s,before dipping to near 30%in the early 1980s.Japan started setting up plants overseas in the 1970s to avoid trade friction.China only recently started making such moves.The question is:where is China on that path?Like Japan,China has

27、 had an extreme property bubble,but not nearly as extreme.Moreover,we are six years on from credit being withdrawn,and the sectors downturn beginning.Home prices are off one-third,mortgage rates down by half,and nominal GDP is up approximately one-third,so affordability has been reset to levels not

28、seen in many years.Equity valuations are low,due to low margins and low multiples.So this is not bubble Japan 1989(when equity values had risen 50 x in the prior 20 years).It has been widely assumed that China will not follow the path of Japan towards a consumer heavy economy,it will only follow Jap

29、an to economic sluggishness.China does appear on a path that has been trod by the US,Japan,Singapore,HK,Taiwan,South Korea,Spain,and many parts of Eastern Europe.Others have obviously stumbled in the middle income trap,but unlike those that have struggled,China has become a global leader in manufact

30、uring,and increasingly services,across all industries.5 February 2025China Equity StrategyDeutsche Bank AG/Hong KongPage 5Figure 5:Standard progress to an advanced economySource:Deutsche BankJapan liberalized its financial system at around this pointIn chapter 12 of the IMF 2013 report,Chinas Econom

31、y in Transition,it explains Japan in the 1980s as a parallel to where China was heading.It notes that before the Plaza Accord,Japans financial system was highly regulated,with interest rates regulated,capital controls strong,and demand for bank credit limited as corporates became cash rich.Japanese

32、investors had acquired significant holdings in US assets,which,together with the weak yen,prompted calls for Japan to open up its financial markets and make yen-denominated assets more attractive.That in turn led to inflows into Japan,so the money supply growing,which generated economic growth and b

33、ubble valuations.China may be heading for a similar point,as President Trump may look to follow President Reagans move,and push for financial liberalization in China as part of a trade deal,and China may be ready to accelerate internationalization of the yuan.We would view that as bullish for equiti

34、es,as the yuan would likely depreciate,lifting the earning power of corporates and attractiveness of Chinese assets in FX terms.Why would the US make such a push?Reasons could include:1)The political optics of getting a deal,2)Belief that a lower yuan can offset the rise in tariffs,allowing trade to

35、 occur and tariffs to be collected,rather than crowded out,or 3)Belief that financial liberalization will lead to a higher yuan,and so weaken China as a competitor.Regardless of the external pressure,if China wants to promote consumption,liberalizing its financial system helps,by normalizing interes

36、t rates,and so ending the wealth transfer from depositors to corporates.This would reduce overinvestment and hyper-competition,as capital got rationed,which would have the benefit of profitability of easing the fiscal crunch as SOEs lift returns.We expect large companies,investment companies and hou

37、seholds to increasingly press the government to ease hyper-competition to boost equity values.Just as the government slowed infrastructure overinvestment,and property overinvestment,industrial overinvestment is the next obvious step-and likely sooner than expected.We expect this will become a key ta

38、lking point in 2025,to mollify the US,and as it seems due,and we expect this to drive a major bull market.5 February 2025China Equity StrategyPage 6Deutsche Bank AG/Hong KongBut what about Chinas declining population?The countrys declining population is a drag on growth,but many nations share that p

39、roblem.We think this entirely misses the big picture,that China has two advantages:1)Automation leadership,with around 70%of installed industrial robots being in China,driving a productivity advantage,and so wealth per capita,and 2)Effectively a massive hinterland that it is bringing into its orbit.

40、The Belt and Road initiative opens up the areas in central and western Asia,the Middle East and North Africa,building and expanding its potential market.While Central Asia has only 80m people,it is rich in resources,while West Asia is largely wealthy with 310m people.South Asia has 2.1bn people,(alt

41、hough two-thirds are in India which,for now at least,heavily restricts trade and investment from China-but that could change in the medium term).And then theres Africa,with 1.4bn.To put it differently,theres as many people to sell to in Africa as there is in China,as many people to sell to in Centra

42、l,West and South Asia(ex India),as many people to sell to in ASEAN+Latin America,and if things get more friendly-as many people to sell to in India.So focusing on Chinas domestic population may lead people to the wrong conclusion on Chinas future.Chinas exports rose 7%in 2024,with exports to Brazil,

43、UAE,and Saudi Arabia up 23%,19%and 18%,respectively,and ASEAN nations in the Belt and Road up 13%.Chinas exports to ASEAN plus BRICS+is now equivalent to its exports to the US plus the EU,with the market share of exports to those destinations having converged by two percentage points p.a.over the la

44、st five years.Even in Latin America,China is making strong inroads.So while China gets hurt if the US imposes high tariffs,DBs economics team sees 10%tariffs in 1H and 10%tariffs late in 2H as creating an 0.5%GDP headwind for China,given US exports represent 3%of Chinas GDP.Thats a manageable hit.Th

45、e downside of Chinas export dominance is protectionist measures in many of the worlds largest nations,even within BRICS+,so the country is partially constrained in its export growth,but will likely increase its corporate footprint one way or the other,whether setting up in other markets,or selling i

46、tems for assembly,due to the quality of its IP and manufacturing value-add.The weaponization of the USD makes investing in offshore infrastructure and plants look increasingly attractive vs.treasuries,so the path forward looks fairly clear.5 February 2025China Equity StrategyDeutsche Bank AG/Hong Ko

47、ngPage 7Figure 6:China reaching out to a new economic world(in millions)Source:Deutsche Bank,Wikipedia5 February 2025China Equity StrategyPage 8Deutsche Bank AG/Hong KongChina-US trade issues may shock to upsideThe consensus on US China tariffs lies somewhere north of DBs house view of 20%tariffs be

48、ing imposed during 2025 in two steps(one of which has been announced already).The reality may end up being far more favorable than such bearish beliefs.The Trump administration is obviously keen on tariffs as a funding source,and sees China as the primary source of such revenue for economic and stra

49、tegic reasons.However,President Trump appears to value tactical wins,perhaps more than clinging to ideological positions that are struggling for traction.In our industry,we have investors,and we have traders.The traders had been in the ascendancy in recent years.Perhaps President Trump is more a pol

50、itical trader than investor(in ideology).If so,expect him to run a fairly tight stop-loss limit.DeepSeek has unsettled the world belief that they could contain China.Better to focus on stimulating business,through lower regulation,cheap energy,and relatively low barriers to import of intermediate pr

51、oducts that cannot be produced competitively domestically.That last part may take longer to get to,but we would expect there will be internal demands to get to a more classic Republican position on trade,from House and Senate members and business leaders.That may take some back-and-forthing,but this

52、 analyst expects a more pro-trade position to ultimately become part of the developing America First agenda before the mid-terms.We think a political trader would look to lock in positions early,and so get a China trade deal in the first half of 2025-and move on to focusing on Western Hemisphere iss

53、ues.A quick deal may involve limited tariffs(as DB expects),back-tracking on some current restrictions,along with some mega-contracts between US and Chinese corporations.If this occurs,(and this analyst does),expect a rally in China stocks.Trade and markets not that closely alignedTrade and economic

54、 strength have gone hand-in-hand throughout history.So we were surprised to find a lack of research linking exports and stock market performance.Chinas exports have,however,closely tracked global money supply growth,which has been rising,but now slowing.When we prompted DBs AI platform to find such

55、studies,it told us:some research indicates that increasing exports can boost corporate earnings,leading to higher stock valuations(but)some studies suggest that focusing solely on export growth can sometimes come at the expense of domestic demand,potentially hindering overall economic growth and thu

56、s impacting the stock market negatively.So,potentially,falling exports could paradoxically boost stocks,at least for some time.Chinas ascent to dominance across industries has come with a heavy dose of overinvestment in many areas.In solar,there is now an effort to curtail supply,and if replicated i

57、n other industries this could be positive for equities,and potentially also release some capital for domestic consumption.Household deposit growth has eased to double the rate of nominal GDP growth,but the USD10tn rise in savings since 2020,we expect to get unleashed disproportionately into spending

58、 and equities in the medium term,and see HK/CH 5 February 2025China Equity StrategyDeutsche Bank AG/Hong KongPage 9stocks as having substantial room to run from earnings acceleration and multiple re-rates.Figure 7:Chinese household bank depositsSource:Bloomberg Finance LPFigure 8:US&EU M2 vs China e

59、xport growthSource:Bloomberg Finance LP5 February 2025China Equity StrategyPage 10Deutsche Bank AG/Hong KongPricing the market leadersFigure 9:Median P/B vs.ROESource:Bloomberg Finance LP,DBFigure 10:P/B vs ROE NasdaqSource:Bloomberg Finance LP,DBFigure 11:P/B vs.ROE CSI300Source:Bloomberg Finance L

60、P,DBThe problem of investing in technology is that profits are concentrated in the market leader,and so an intense battle to achieve that position can occur.Investors in China are fully aware of this issue,but the same was true for leading tech stocks,like Amazon,at one point.If we compare the CSI30

61、0 to NASDAQ,both of which are full of global leaders in their field,we see that the US is generating double the ROE,but investors are paying four times the book value(8.2x vs.2.0 x).Most of the Chinese large caps are also listed in HK,where they can typically be bought around 40%cheaper,so near 1x.I

62、f we look at the MSCI China Index,it is trading at a record discount to the world index of 10 P/E points,while also being very near the low end of its valuation range.As Chinas corporates are eating the world,it seems that this valuation discount should at some point return to being a premium.Invest

63、ors we believe will have to pivot sharply to China in the medium term,and will struggle to get access to its stocks without bidding them up.We were bullish,but were troubled by the difficulty in finding what would make the world wake up and buy,and we believe Chinas Sputnik moment(or moments with EV

64、 dominance as well)is it.We expect HK/CH to continue to be leading markets in the medium term,just as they were in 2024.Figure 12:Forward P/E of MSCI China vs MSCI WorldSource:Bloomberg Finance LP,DB5 February 2025China Equity StrategyDeutsche Bank AG/Hong KongPage 11Figure 13:APAC model portfolioSo

65、urce:Bloomberg Finance LP,DB5 February 2025China Equity StrategyPage 12Deutsche Bank AG/Hong KongAppendix 1Important Disclosures*Other information available upon request*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges v

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68、 reflect the personal views of the undersigned lead analyst(s).In addition,the undersigned lead analyst(s)has not and will not receive any compensation for providing a specific recommendation or view in this report.Peter Milliken.5 February 2025China Equity StrategyDeutsche Bank AG/Hong KongPage 13E

69、quity rating dispersion and banking relationships Equity Rating and Dispersion Key The Equity Rating Dispersion Chart depicts the following:The proportion of recommendations that are rated buy,sell and hold over the previous 12 months.This is shown for securities issued in the stated region e.g.Euro

70、pe Universe.See rating definitions below.This is represented by the Companies Covered bars in the chart.The percentage value displayed above the bar is the proportion as a percentage.E.g.50%above the“buy”/“Companies Covered”bar means that 50%of DBs equity research covered companies over the past 12

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