After the explosive popularity of Deepseek, a reassessment may be necessary for the entire China Assets.

In the latest report on February 5, Deutsche Bank is bullish, stating that 2025 will be the year China surpasses other countries, predicting that the "valuation discount" of Chinese Stocks will disappear, and the bull market of A-shares/Hong Kong stocks will continue and exceed previous highs. Deutsche Bank stated:

2025 is seen as the year the investment community realizes China's leading position in global competition. It is increasingly hard to deny that Chinese companies provide high cost-effectiveness and quality products in multiple manufacturing and service sectors.

We expect the "valuation discount" of Chinese Stocks to disappear, with profitability potentially exceeding expectations due to policy support for Consumer spending and financial liberalization. The bull market for Hong Kong/A-shares began in 2024 and is expected to exceed previous highs in the medium term.

Specifically, Deutsche Bank stated that China's manufacturing and service sectors occupy a global second-line position, while DeepSeek is more like China's "Sputnik moment."

China also leads in sectors such as Outfits, textiles, toys, basic electronics, Steel, shipbuilding, as well as complex industries like telecommunications equipment, nuclear energy, defense, and high-speed Railroads. In 2025, China launched the world's first sixth-generation fighter jet and its low-cost AI system DeepSeek within a week.

Marc Andreessen termed the launch of DeepSeek as the "Sputnik moment for AI," but it resembles China's Sputnik moment more, as China's intellectual property has gained recognition. China has performed exceptionally in high value-added fields and is dominating supply chains, expanding at an unprecedented pace.

Deutsche Bank believes that China is now in the early 1980s like Japan.

People are beginning to realize that China's current position is not like Japan in 1989, but rather in the early 1980s, when Japan's value chain was rapidly rising, offering higher quality products at lower prices and constantly innovating.

Moreover, Deutsche Bank optimistically points out that the US-China trade issues may bring positive surprises, and that trade and markets are not so closely related.

As Chinese companies continue to strengthen their dominant position globally, the valuation discount should eventually turn into a premium. We believe investors will have to quickly pivot towards China in the medium term, and it will be difficult to obtain Chinese stocks without pushing prices higher.

The advantages of China's manufacturing industry are becoming increasingly prominent.

In recent years, the advantages of China's manufacturing industry on a global scale have become increasingly prominent.

Deutsche Bank stated:

From its initial rise in Outfits, textiles, and toys to its current dominance in basic electronics, Steel, and shipbuilding, the development trajectory of China's manufacturing industry is remarkable. Especially in the fields of White Appliances and CECEP Solar Energy, the performance of Chinese companies is especially notable.

Notably, China's rise in complex industries such as telecommunications equipment, nuclear power, defense, and high-speed railways showcases its strong technological capabilities. By the end of 2024, China's rapid emergence in the Autos export sector has drawn Global attention, as its high-performance, visually appealing, and competitively priced electric vehicles (EVs) successfully penetrate the international market. In 2025, China even launched the world's first sixth-generation fighter jet and the low-cost AI system DeepSeek in just one week, which is viewed as an important symbol of the recognition of Chinese intellectual property.

The strength of China's manufacturing industry can be evidenced by the following aspects:

1. Export scale: China's Commodity export volume is double that of the USA, contributing 30% to the added value of Global manufacturing.

2. Patent applications: In 2023, China accounted for nearly half of global patent applications. In the electric vehicle sector, China holds about 70% of the patents, with similar advantages in 5G and 6G telecommunications equipment.

3. Talent reserve: Apart from India, China has more STEM (science, technology, engineering, and mathematics) graduates than any other country in the world.

4. Industrial clusters: China has created local professional clusters similar to Silicon Valley for key industries and closely collaborates with universities on research.

China is more like Japan in the early 1980s.

Deutsche Bank believes that China is more like Japan in the early 1980s:

Japan's growth has been achieved through the utilization of abundant cheap labor, intensive use of capital, and improvements in productivity. Domestic investment accounts for over 30% of GDP, thanks to a financial repression policy that maintains low interest rates. Japan acquires new technologies through joint ventures. Savings accounted for 40% of GDP in the early 1970s, then dropped to nearly 30% in the early 1980s. Japan began establishing factories overseas in the 1970s to avoid trade friction, while China only recently started taking similar actions.

Deutsche Bank also stated:

A liberalized financial system helps promote consumer spending by normalizing interest rates, thus ending the transfer of funds from depositors to corporations. This will reduce over-investment and excessive competition, as capital becomes rationed, which will benefit the improvement of the ROI of state-owned enterprises. We expect that as state-owned enterprises enhance their returns, there will be demands to alleviate excessive competition in order to boost stock values. We anticipate that this will become a key topic by 2025, and this factor will be crucial in driving a bull market.

Moreover, China's economy and exports continue to maintain rapid growth. In 2024, China's exports are expected to grow by 7%, with exports to Brazil, UAE, and Saudi Arabia growing by 23%, 19%, and 18% respectively, and a 13% growth to ASEAN countries in the Belt and Road Initiative Concept. Exports from China to ASEAN countries and BRICS nations now equal the total exports to the USA and EU, with the market share for these destinations increasing by two percentage points annually over the past five years.

The driving forces behind China's economic growth come from several aspects:

1. Manufacturing advantages: China possesses world-leading companies in nearly every industry, continuously capturing market share.

2. Belt and Road Initiative Concept: This initiative opens regions such as Central Asia, West Asia, the Middle East, and North Africa, expanding China's potential market.

3. Leading in automation: About 70% of industrial robots are installed in China, driving productivity advantages.

4. Domestic demand potential: Household deposits have slowed to double the nominal GDP growth rate, but since 2020, savings have increased by 10 trillion dollars, and it is expected that these savings will flow into consumption and the stock market in the medium term.

The China-US trade issues may bring positive surprises, as trade and market are not so closely related.

According to a previous report by CCTV news, US President Trump signed an executive order on February 1 to impose a 10% tariff on goods imported from China. However, Deutsche Bank believes that the actual situation may be more favorable than expected. The Trump administration seems to value tactical victories over adhering to ideologically difficult positions.

The launch of DeepSeek has shaken the world’s belief that China can be contained. A better approach might be to stimulate business by reducing regulations, providing cheap energy, and lowering barriers to imports of intermediate products. It is expected that the pro-trade stance will eventually become part of the developing 'America First' agenda before the midterm elections.

Deutsche Bank's analysis suggests that a quickly reached China-US trade agreement may involve limited tariffs, the removal of some current restrictions, and some large contracts between US and Chinese companies. If this occurs, it is expected that the Chinese stock market will rise.

The decline in exports may actually drive the stock market up for a while. China's dominance in various industries has been achieved through excessive investment in many areas. If supply can be limited, it could benefit stocks and release some capital for domestic consumption.

Overall, Deutsche Bank believes that as Chinese companies continue to solidify their dominance globally, investors may need to quickly adjust their strategies to increase allocation to the Chinese market. It is expected that the Hong Kong/Chinese stock market will continue to lead the global market in the medium term, extending its strong performance into 2024.

We believe that global investors often severely underallocate to China, just as they avoided fossil fuels a few years ago, until the market punished those who made non-market decisions. We see today’s fund holdings in China as similar. Investors who like leading companies with moats cannot ignore that it is now Chinese companies that have broad and deep moats, rather than Western companies.

As China's leading position among companies globally continues to strengthen, the valuation discount of Chinese stories should ultimately shift to a premium. It is believed that investors will have to quickly turn their attention to China in the medium term, and it will be difficult to acquire Chinese Stocks without pushing up their prices. We have maintained a bullish outlook, but have been puzzled about what factors would prompt the world to awaken and make purchases, and we believe that China's "Sputnik moment" (or dominance in the electric vehicle sector) is that factor.

Editor/lambor