The global contest for economic and technological dominance between the United States and China is being fiercely fought in trade and innovation. However, one arena where China is decisively pulling ahead is the capital markets. With Chinese stocks rallying at an unprecedented pace, global investors are turning their focus towards Beijing as Wall Street faces increasing headwinds.
The contrast in market performance could not be clearer. The Hang Seng index in Hong Kong has surged over 20% this year, with the CSI 300 index of mainland China following suit with a 3% rise. Meanwhile, Wall Street struggles, with key U.S. indices showing an increasingly negative outlook for 2025. Nowhere is this divergence more apparent than in the technology sector. The Hang Seng Tech index, which tracks the 30 largest tech firms listed in Hong Kong, has climbed 35%, while the Nasdaq Composite has suffered a steep decline of nearly 10%, marking its worst day since September 2022.
Investor sentiment is shifting dramatically in favour of China. The MSCI China index has soared 19% in early 2025, marking the strongest start to a year in its history. Its 29% surge from previous lows represents one of the most significant rallies on record, surpassing even the post-financial crisis recovery and the rebound following the Covid pandemic. Despite years of disappointment, China’s stock market is charting a powerful turnaround, bolstered by factors such as relatively milder-than-expected U.S. tariffs, improving domestic demand, and the emergence of a game-changing AI powerhouse—DeepSeek.
DeepSeek, a revolutionary open-source artificial intelligence model, has emerged as a direct challenger to U.S. dominance in the AI space. More cost-effective and efficient than existing alternatives, this breakthrough has triggered a major shift in the technology landscape. The rise of DeepSeek has accelerated the decline of the so-called Magnificent Seven—America’s leading tech giants—which are now struggling under high valuations and market corrections. The belief that China lagged far behind the U.S. in AI development has been shattered, and investors are recalibrating their expectations.
According to Goldman Sachs, the widespread adoption of AI across China’s economy could boost corporate earnings by 2.5% annually over the next decade. This structural shift is expected to elevate market valuations by up to 20%, with potential investment inflows surpassing $200 billion. The rotation from U.S. to Chinese tech stocks is already evident. While American tech giants have floundered, China’s leading firms are thriving—Alibaba has surged 64%, Xiaomi 58%, Tencent 24%, and Baidu 14%, reaffirming confidence in China’s tech sector.
Despite the optimism, challenges remain. The Chinese economy continues to navigate headwinds such as U.S. tariffs, a persistent real estate crisis, and the need to stimulate domestic consumption. Deflationary pressures are also in play, with the Consumer Price Index dropping 0.7% in February, its first decline since early 2024. However, major financial institutions remain optimistic. Citi has revised its GDP growth forecasts for China upwards, predicting 4.7% growth in 2025 and 4.8% in 2026—figures approaching Beijing’s target of 5% growth this year. Analysts suggest 2025 could be a defining year, as China’s new economy gains traction and signs of housing market stabilisation emerge, supporting a rebound in consumer spending.
Geopolitical tensions between China and the U.S. remain a wildcard, extending beyond tariffs to potential regulatory hurdles. Goldman Sachs has warned of possible restrictions on U.S. investments in Chinese firms or tighter accounting standards for Chinese ADRs listed in the U.S. In a worst-case scenario where U.S. investors are banned from holding Chinese stocks, the forced liquidation of assets could exceed $800 billion, triggering a financial shockwave.
Despite these risks, China’s stock market resurgence is capturing the attention of global investors. With a thriving tech sector, AI breakthroughs, and an increasingly resilient economy, China is making a compelling case for its financial supremacy in 2025.
China is home to some of the world’s most influential companies, driving growth across sectors such as technology, e-commerce, and artificial intelligence. Giants like Alibaba, Tencent, Xiaomi, and Baidu are shaping the future of innovation, cementing China’s place as a dominant force in the global economy.
Fidelity China Special Situations PLC (LON:FCSS), the UK’s largest China Investment Trust, capitalises on Fidelity’s extensive, locally-based analyst team to find attractive opportunities in a market too big to ignore.
