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This divergence tells us that China’s economy is fundamentally restructuring. And in a market undergoing structural transition rather than cyclical bounce, passive exposure increasingly means owning yesterday’s winners alongside tomorrow’s casualties.

I have managed Chinese equity strategies for over twenty years, through multiple policy pivots and market dislocations. China equities are at the early stage of a structurally different growth cycle, and itis among the most compelling I have seen for active stock selection. But it is also among the least forgiving for investors who mistake a broad market recovery for permission to own everything indiscriminately.

The ground-level reality in China today is one of stark sectoral divergence. Technology-related industries tied to global AI demand are thriving.

The old Chinese cycle of synchronized boom and bust is behind us, replaced by a reallocation: momentum is shifting from bricks and mortar to bytes and batteries. Companies aligned with strategic industries (e.g., innovation, domestic technology capability and electrification infrastructure) are being rewarded. Legacy sectors are being forced to adapt or shrink.

For investors, this means that simply ‘owning China’ is no longer a coherent strategy.  

A few areas stand out as particularly compelling for long-term positioning, each reflecting China’s evolving competitive advantages.

China remains the most reliable and cost‑efficient global manufacturing base, especially during periods of geopolitical disruption. The discussion highlighted that recent global tensions have reinforced China’s position as the only scalable and stable supply chain for many industries, from industrial goods to advanced components. This gives Chinese companies durable competitive advantages and supports long‑term earnings growth.

Healthcare represents another area of durable structural growth. China's biopharmaceutical sector benefits from a significant cost advantage: McKinsey estimates Chinese firms run clinical development at 20-50% of US cost levels, while early-phase trials can cost as little as 15-20% of their Western equivalents – a structural efficiency that is accelerating innovation output.²

The companies we favor are not domestic-only plays facing volume-based procurement pressure. They are businesses participating in the global pharma value chain, often with FDA-approved products or late-stage candidates being acquired by Western multinationals.³

In the global AI arms race, while the US leads in foundational AI models, China’s structural edge lies in hardware manufacturing, energy efficiency and large‑scale AI application. China is particularly strong at turning innovation into mass adoption and commercialization, benefiting sectors such as semiconductors, electronics, industrial automation and consumer applications.

One final advantage deserves mention. Hong Kong reclaimed its position as the world’s top fundraising market in 2025, supported by record southbound flows.^4,5 We have participated selectively in IPOs across technology, healthcare, consumer and industrials. We focused on companies with genuine growth stories, competitive moats and reasonable valuations.

This represents a compounding structural advantage for active managers. Today’s IPO candidates are tomorrow’s index constituents. These are companies that, if they succeed, will eventually achieve the scale and liquidity required for index inclusion. Passive investors cannot access them before that point; by the time they enter the index, the rerate has often already happened and the index buyer inherits a stock at maturity price, not entry price.

Active managers who underwrite quality names early hold not only the business growth runway ahead, but future index heavyweights at cost. The IPO pipeline is, in effect, a preview of what the China equity indices will look like in five years, and the ability to participate selectively in that pipeline is a clear structural edge.

Twenty years of managing Chinese equities has taught us to be cautious about sweeping narratives. China is neither the unstoppable juggernaut of the 2000s nor the uninvestable market Western commentators all-too-recently claimed. It is a large, complex and rapidly evolving economy with genuine competitive advantages in specific areas and structural challenges in others.

What has changed is that the gap between winners and losers within the Chinese market has widened dramatically. Passive exposure effectively gives you both. Disciplined and research-intensive active management, on the other hand, can give you the ability to capture the former while avoiding the latter.

The discipline we apply today is the same discipline that kept us out of the 2015 margin-financing bubble, when we backed quality businesses with durable earnings rather than chasing speculative momentum. It is also the same discipline that has kept us selective during the immediate post-DeepSeek frenzy, when a narrow group of AI-adjacent names became crowded and valuations stretched beyond fundamentals.

China’s policy-driven transition is creating specific opportunities in areas such as the technology value chain, electrification infrastructure, global healthcare and energy storage. After twenty years managing Chinese equities, I am as convinced as I have ever been that the next chapter will be written not by those who own China broadly, but by those who own it selectively.