Market Update - China’s bifurcated economy and the full-arc AI opportunity

Highlights: The YTD performance gap between China’s A-shares (e.g. CSI300: +8.4 per cent) and the MSCI China Index (-15.5 per cent) or Hang Seng Index (-10.0 per cent) is material. The gap is even wider in the tech space. Year-to-date, the ChiNext Index – a Nasdaq-style board on the Shenzhen Stock Exchange – recorded 36.5 per cent return vs HSTECH’s -20.1 per cent. While this is to some extent reflective of the structure of the global AI rally so far, the difference is amplified by China’s K-shape economic story. For that reason, we currently hold a preference for A-shares over H-shares, driven primarily by A-shares’ much larger exposure to AI-related hardware beneficiaries. Having said that, we believe it is important to be positioned in the full-arc AI opportunity set in China, which means taking exposure to some of the large offshore-listed internet and cloud players as critical enablers of the AI transition and adoption.

• The K-shaped bifurcation of the Chinese economy may be deepening. The upper arm of the K — AI compute, semiconductors, and advanced equipment and hardware — is expanding rapidly, fueled by policy support, export-driven demand and domestic substitution. The lower arm — consumption, property, and discretionary spending — remains structurally impaired. According to economic activity data in May, the two arms have diverged even further
• The splits map directly onto equities. The global AI rally of 2025–26 has been concentrated in AI hardware enablers (semiconductors, advanced packaging, optic modules, and AI servers), asset classes where A-share listings on ChiNext and the STAR50 board dominate. By contrast, H-share technology names (China’s large internet platforms and AI application adopters) are dragged by consumption weakness, regulations and a near-term capex overhang. We believe such divergence is predominantly a market composition story
• On the growth and innovation leg of our Barbell Strategy in China, we think it is important to stay invested across the entire AI ecosystem. We currently hold a clear preference for A-shares over H-shares. Key A-share tech benchmarks (ChiNext and STAR50) provide concentrated exposure to AI hardware and industrial value chains that stand to benefit directly from accelerating global AI capex. That said, large Hong Kong-listed tech stocks provide deeply discounted entries into the AI monetisation layer and complement the onshore listed AI hardware names. While they have been under pressure due to margin challenges in their traditional business (i.e., e-commerce and food delivery) and regulatory headwinds, low valuation means some of their market-leading model/cloud business has become somewhat a “free option”