There is chaos under the sky, so the situation is excellent?

Carlo Gioja, Portfolio Manager and Head of Asia Business Development, Plenisfer Investments SGR

TINA, or "There Is No Alternative", has been the mantra of markets for almost two decades, during which time investors have focused primarily on Wall Street. We have been warning about excessive concentration risk in the US market for some time, and since early March we have seen a significant correction that has brought valuations in the tech sector back to pre-Trump levels*[1]. 

Was this a physiological correction or has the wind changed?

Markets certainly don't like the uncertainty created by Trump's hundred days of shock and awe, particularly the unpredictable shifts in tariff policy. More generally, the perception of American markets as predictable and based on widely shared, enduring principles and the rule of law has been fundamental to Wall Street's success. Any event that casts even the slightest doubt on these foundations inevitably damages the implicit "risk discount" long associated with the United States.

Indeed, investors prefer regions where the stability and predictability of the rules and the economic system are well established. This is one of the reasons why investors have fled China over the past three years. The regulatory crackdown on the technology sector, and the ongoing property crisis, have created an environment perceived as unfavourable to private investment.

But which country seems more "predictable" right now - the US or China?

China is no longer pursuing high growth rates but is instead focusing on industrial policy in strategic sectors such as AI, semiconductors, energy and electric mobility, where Chinese companies dominate the local market and are rapidly expanding internationally.

The growth target of 5% by 2025[2]* is to be achieved through "proactive fiscal policy" to support domestic consumption and technological innovation. While no groundbreaking measures have yet been implemented, there are signs of change. For example, the budget deficit has been set at 4% of GDP, up from 3% last year* - the highest in three decades. On the technological innovation front, a new bond platform has been announced to help tech companies issue onshore debt for growth, and the loan programme for innovative industries has been doubled to €127bn*. And the Finance Minister just highlighted the need to “invest in people” alongside investment in infrastructure – a meaningful shift in official language.

Despite China's proven track record as a hotbed of innovation, investors still tend to underestimate its potential. According to the Australian Strategic Policy Institute's Critical Technology Tracker, China leads the world in 57 out of 64 critical technologies. This success is due not only to an aggressive industrial policy and a quarter-century of a favourable global trading environment, but also to the entrepreneurial brilliance of many individuals in one of the world's most brutally competitive economies. Increasingly, in a long list of industries, the most formidable competitors to our own best companies are Chinese. If these Chinese champions are so fearsome that only an imposing array of trade barriers can hope to stem the rising tide of competition, perhaps we as investors should ask ourselves whether we are missing out on important opportunities. Particularly given the information asymmetry and the generally undemanding valuations.

China's support for industrial innovation is consistent with its intention to remain open for business while trying to position itself as a more predictable ecosystem. The recent public "rehabilitation" of Jack Ma and the global success of DeepSeek, widely reported in the Chinese media and embraced by the public, are clear signals of a strategic retreat - at least for now - from the "excesses of statism" of the Zero Covid years. Beijing has been strongly reminded that fostering a truly innovative economy still means encouraging and enabling private enterprise to flourish.

This desire for stability is also reflected in the currency market: the US dollar has remained virtually unchanged (-0.9%) against the onshore renminbi, while the euro has strengthened slightly, resulting in a depreciation of the Chinese currency of around 4% since the beginning of the year.* Beijing is carefully managing its exchange rate against the dollar to maintain stability, while taking advantage of the depreciation of other currencies to boost exports, particularly within Asia.

China also wants to establish its currency as a reference for non-aligned countries. Maintaining a stable renminbi is therefore a key objective to signal its economic relevance. According to China's General Administration of Customs, China has now become the leading trading partner for more than 150 countries and regions. In this context, a strong euro is also beneficial for China.

The newly introduced 10-15% tariffs - in response to Trump's broad 20% tariff increase on all Chinese imports* - are limited to certain agricultural products, strategically avoiding an escalation of the trade war for now. This approach has been further facilitated by China's decision not to devalue its currency.

The tariff war is not yet fully underway and its long-term impact on global trade remains to be seen. In a scenario where tariffs are not a targeted weapon aimed at a few specific industries or adversarial nations, but rather a broad policy affecting all US trading partners in an attempt to rewrite the rules of global trade, China has competitive advantages that may paradoxically make it more resilient than most. China's deeply integrated supply chains and its ability to scale production are unrivalled in the world. Add to this a growing capacity for innovation, and it is clear that China's top companies could maintain their global competitiveness for years to come.

For these reasons, we believe that the pessimism about China that has prevailed in recent years is less justified today. China's structural problems are well known and often factored into market valuations. However, the same cannot yet be said for the potential of its best companies.

[1] * Source: Bloomberg

[2] *Source: Bloomberg

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