Another ‘Taobao’ moment helps China return to growth

[SINGAPORE] In recent years, a wave of Chinese creativity and technology has been influencing industries and capturing the imagination of the world.

Products such as Labubu, which kick-started an international frenzy for collectible toys, Ne Zha 2, which showcases China’s rapidly developing animation and film-production capabilities, and DeepSeek, which is revolutionising artificial intelligence (AI)-driven applications, are more than just business success stories. These ventures exemplify the strides that the country has made in innovation, as well as its growing influence in the global marketplace.

This phenomenon, though, is not new. Some have dubbed the emergence of DeepSeek as the “Sputnik moment” for AI, drawing parallels to the first man-made satellite launched by the former Soviet Union in 1957 that sparked an arms race with the US and the Cold War.

However, in my view, DeepSeek’s rise mirrors the “Taobao” moment in 2003, when the launch of the Chinese online e-commerce site made the world realise that selling things online can be free, and a local player successfully challenged a dominant US e-commerce giant.

Taobao’s emergence showed that e-commerce platforms can make money from smart algorithms, payments and scalable ecosystems. More importantly, it led to a multi-decade, explosive growth in the Chinese e-commerce industry.

Fast forward to 2025, and as AI evolves from infrastructure building to being used in applications and for monetisation, DeepSeek’s emergence may signal yet another “Taobao” moment.

Tale of two cities: evolution of AI development

Throughout 2023 to 2024, AI was capital-intensive, requiring investment in advanced chips and data centres to build the large language models that are its building blocks. As a result, investors were focused on chip designers and other AI leaders in the US, with America thus becoming dominant in the industry at this stage of development.

Chinese firms were slower to develop AI during this time, partly as government policy reduced tech capital expenditure sharply in 2022 and 2023. But this changed in 2024, when major Chinese AI adopters quietly but steadily plowed more than US$25 billion into capex, a 60 per cent increase from 2023 and higher than 2021 levels.

While the Chinese investment pales in comparison with the US$270 billion that US AI adopters are shelling out in capex, China is narrowing this gap as its ecosystem grows. Local governments are pouring resources into local AI firms in a domestic competition to catch up with Hangzhou, where DeepSeek is based.

For example, the Beijing education department recently announced that AI education would be compulsory in primary and secondary public schools by autumn 2025. The Shenzhen government also announced a 50 billion yuan (S$9.2 billion) fund to invest in firms at every stage of AI and robotics development. The fund will have an unusually high-risk tolerance to invest in technologies that may be hard or take a long time to commercialise.

These AI-oriented policies are flowering across the nation. As AI moves into its second phase of development, focusing on applications and software, it will be the most efficient adopter that is likely to capture greater market share, not necessarily the one with the most computing power. China’s unique advantages of a low-cost talent pool, massive user base and powerful platforms that can scale up the user base fast, may put the country in good stead to capture the opportunities.

Is it time to invest in China’s AI ecosystem?

Chinese equities, as measured by the MSCI China Index, returned 40 per cent since the start of 2024. This far outpaces the 16 per cent return from the S&P 500. The contrast is especially sharp since February when S&P 500 fell 10 per cent, while Chinese equities gained 3 per cent.

This outperformance came as investors pivoted from US tech shares to Chinese ones. Even so, equities in Chinese AI adopters continue to trade at a steep discount, at a projected 18 times the 12-month forward earnings per share, compared with 25 times of their US counterparts’.

In early 2023, before ChatGPT became a global phenomenon, these Chinese firms were valued similarly as those in the United States. Chinese valuations then nearly halved by early 2024, and have since rebounded. But throughout 2023 to 2025, earnings growth for both groups were similar, at 55 per cent. In other words, the valuation gap is likely to further narrow.

The potential impact of tariffs

Many investors stayed out of Chinese equities because of worries over tariffs and geopolitical tensions. The principal concern was that the Chinese currency might depreciate if tariffs or tensions rose above market expectations. The impression of “US exceptionalism” kept the US dollar strong, at the expense of most other markets.

These risks, however, are subsiding with the collapse of US growth expectations.

The US is effectively tightening fiscal policy through tariffs and mass layoffs of government employees, which has damaged consumer confidence and put many businesses in a state of paralysis regarding hiring and capex decisions.

Meanwhile, Europe and China are expanding fiscal policy and lifting growth expectations. Europe is preparing to expand long-held government budget restrictions to invest in infrastructure and defence, while China is expanding fiscal policy not just to boost AI, but also to stabilise the real estate market, encourage childbirth and boost consumer spending.

This divergence is pushing US bond yields down and lifting European and Chinese yields. Exchange rates are largely driven by the gap between currency yields. This gap is narrowing between the US and the rest of the world, leading to a weaker US dollar and offsetting some of the impact of additional tariffs on markets such as Europe and China.

Diversification in AI investments

AI development is in its early stages, with still very limited use cases. The focus will likely be on applications, including both software and devices, in the future.

Competition in these areas will be global, with potentially millions of companies taking part and broad support from governments. It is going to be very difficult for the early leaders to maintain their position.

As a result, we believe it is critical that investors diversify the exposures across sub-industries and geographies.

Ironically, President Donald Trump’s “America First” policies have at least paused “US exceptionalism” and are reducing external risks for Chinese assets. Until the Trump administration is satisfied with deals that are yet to materialise, US markets are likely to remain under pressure. During this period of turbulence, Chinese equities can serve as a good source of uncorrelated returns.

China’s AI adoption just got a big adrenaline shot. Though the valuation gap between Chinese and US AI adopters remains wide, this is likely to narrow in the future.

As we’ve witnessed over the past year, trying to capture brief bursts of market rallies can be difficult. But staying invested in a gradually recovering market that just had another “Taobao” moment would likely see investments outperforming.

The writer is head of Asia-Pacific investment strategy, Citi Wealth