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China is back and asserting itself as a major innovation leader

Natale Labia
By Natale Labia
18 Mar 2025
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For the first time in many years, China appears to be making meaningful progress in tackling its long-term challenges through innovation, productivity and strategic macroeconomic planning.

The tables have turned. Since the Covid pandemic, the US economy has outpaced all other major economies while China – battling with an imploding property sector, stalling exports, deflation and weak consumer confidence – has been on the back foot. Yet, over the past few months, concerns over the sustainability of China’s high investment, high savings and low consumption economic model have receded. What has triggered this reassessment? Is China making a comeback?

China is innovating, not just replicating


Two factors suggest that China may avoid a long period of economic stagnation akin to Japan’s “lost decade” following the collapse of its property bubble in the late 1980s.

First is the resurgence in innovation across the Chinese economy, which appears to be at the heart of China’s recovery. Nowhere is this more evident than in artificial intelligence, where Chinese tech firms are driving new waves of investment and productivity gains.

Chinese company DeepSeek has shaken up the AI landscape, previously dominated by Silicon Valley’s deep-pocketed giants. While many investors doubted China’s ability to compete with AI, DeepSeek’s models have not only proven their competitiveness, but also shifted the entire industry’s dynamics. By reducing the need for high-end chips and accelerating the “commoditisation” of AI models, China is narrowing the technological lead of US firms.

Evidence of these shifts is already visible. Apple recently partnered with Alibaba to integrate its own AI into iPhones sold in China, suggesting that Chinese AI is competitive. And Tencent announced it will use DeepSeek’s cheaper model rather than its own, justifying lower capex spending.

This transformation extends beyond AI. Long derided by one-liners such as “the US innovates, while China replicates”, now the opposite seems to be happening.

This week, shares of Chinese electric automaker BYD jumped to a record high after the company unveiled a new lineup of electric vehicles capable of charging almost as quickly as refuelling a conventional car. BYD’s latest battery and charging system – tested on its new Han L sedan – charges around 400km of range in just five minutes, according to Chairman Wang Chuanfu. This significantly outpaces the fastest charging speeds offered by Tesla or any European EV manufacturer.

Indeed, the diverging fortunes of Tesla and BYD provide a striking metaphor for the shifting balance of power between the world’s two largest economies. Tesla – led by US President Donald Trump’s chief crony – has seen its stock plummet by 50% this year to date, wiping out about $750-billion in market value. Meanwhile, BYD’s stock has surged 40% over the same period, according to Bloomberg data.

A revival in Chinese equities


Chinese equities, long dismissed as a moribund and forgotten asset class, have re-entered the conversation. While far off from the all-time highs reached in 2021, the MSCI China benchmark index is up an astonishing 40% over the past year, far outpacing the US and even Europe’s recent rally. Bloomberg data shows that the S&P 500 and the Euro Stoxx 50 have gained a meagre 8% and 9% respectively over the same period.

Technology stocks have led this resurgence. The Shanghai Shenzhen 300 infotech sub-index is up 9% since the start of the year, driven by domestic semiconductor companies and major tech players such as Alibaba and Tencent, as well as BYD. Tencent’s rebound has also provided a boost to the Johannesburg Stock Exchange, with Naspers and Prosus – heavily invested in Tencent – both rising around 14% year to date.

China is no longer just playing catch-up. It is asserting itself as a major global innovation leader.

Arise, the Chinese consumer


Yet a potentially more lasting shift is that Beijing appears to be acknowledging the urgent need for a fundamental recalibration of China’s economic model – away from reliance on savings and investment, and towards greater consumption.

This week, Beijing announced a plan to “vigorously boost consumption” and “expand domestic demand in all directions”, according to Xinhua, China’s state news agency. This echoes President Xi Jinping’s exhortation late last year for policymakers to shift towards supporting demand following years of prioritising industrial growth.

To stimulate spending, the government aims to raise household incomes, introduce incentives to increase the birth rate, implement a minimum wage and invest heavily in social infrastructure including healthcare, childcare and education. All are measures that the government hopes will encourage families to spend more and save less.

Boosting consumer spending is critical as China faces a slowdown in exports – an essential driver of economic growth – amid protectionist US policies designed to hurt the Chinese economy and disrupt global trade. Exports accounted for nearly a third of China’s GDP growth in 2024.

Domestic spending in China has been weak since the end of Covid-19 lockdowns more than two years ago as households exercised caution over expenditure. Consumer prices fell into deflation in February, at least partly due to the Lunar New Year holiday. Meanwhile, a prolonged downturn in China’s property sector – exacerbated by an official deleveraging campaign now in its fourth year – has further dampened household expenditure, kept prices low and contributed to stagnating wages.

However, signs of a recovery are emerging. Retail sales posted their best reading in the first two months of the year since October, according to the National Bureau of Statistics, while industrial output exceeded the median estimate in a Bloomberg survey of analysts. Growth in fixed-asset investment marked the fastest since the gain in the first four months of 2024.

Headwinds such as the ailing property market and the threat of Trump’s tariffs remain. Yet for the first time in many years, China appears to be making meaningful progress in tackling its long-term challenges through innovation, productivity and strategic macroeconomic planning. While the West is seemingly doing its best to self-destruct, one economic superpower is biding its time, watching and waiting – China. DM

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