Deutsche Bank: It's not just DeepSeek, 2025 will be a year for Chinese companies to rise globally, and the "valuation discount" of Chinese stocks will disappear

After the explosive growth of DeepSeek, what needs to be reassessed is the entire Chinese asset landscape.

In the latest report on February 5, Deutsche Bank expressed bullish sentiments, stating that 2025 will be the year China surpasses other countries, and the "valuation discount" of Chinese stocks is expected to disappear, with the bull market in A-shares/Hong Kong stocks continuing and exceeding previous highs. Deutsche Bank stated:

2025 is seen as the year the investment community realizes China's leading position in global competition. It is becoming increasingly difficult to deny that Chinese companies offer high cost-performance and quality products in various manufacturing and service sectors.

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

Specifically, Deutsche Bank noted that China's manufacturing and service sectors occupy a dual position globally, and DeepSeek is more like China's "Sputnik" moment.

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

Marc Andreessen referred to the launch of DeepSeek as "the Sputnik moment for artificial intelligence," but it is more like China's Sputnik moment, where Chinese intellectual property is recognized. China is excelling in high value-added sectors and dominating the supply chain, expanding at an unprecedented pace.

Deutsche Bank believes that China today is in a position similar to Japan in the early 1980s.

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

Additionally, Deutsche Bank optimistically pointed out that the China-U.S. trade issues may bring positive surprises, and trade and markets are not so closely related:

As Chinese companies continue to solidify their dominance globally, the valuation discount should ultimately shift to a premium. We believe investors will have to quickly pivot to China in the medium term, and it will be difficult to acquire Chinese stocks without driving up prices.

The Advantages of Chinese Manufacturing Are Becoming More Prominent

In recent years, the advantages of Chinese manufacturing on a global scale have become increasingly evident.

Deutsche Bank stated:

From its initial rise in clothing, textiles, and toys to its current dominance in basic electronics, steel, and shipbuilding, the development trajectory of Chinese manufacturing is remarkable. Particularly in the fields of white goods and solar energy, Chinese companies have made significant strides.

Notably, China's rise in complex industries such as telecommunications equipment, nuclear power, defense, and high-speed rail demonstrates its strong technological capabilities. By the end of 2024, China's rapid rise in automobile exports has attracted global attention, with its high-performance, visually appealing, and competitively priced electric vehicles (EVs) successfully entering international markets. In 2025, China launched the world's first sixth-generation fighter jet and the low-cost artificial intelligence system DeepSeek within just one week, which is seen as an important sign of recognition for Chinese intellectual property**

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

1. Export scale: China's goods export value is twice that of the United States, contributing 30% of the global manufacturing value added.
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 collaborates closely with universities in 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 was achieved by leveraging abundant cheap labor, capital-intensive use, and productivity improvements. Domestic investment accounted for over 30% of GDP, thanks to a financial repression policy that maintained low interest rates. Japan acquired new technologies through joint ventures. Savings accounted for 40% of GDP in the early 1970s, then fell to nearly 30% in the early 1980s. Japan began establishing factories overseas in the 1970s to avoid trade friction, while China has only recently started taking such actions.

Deutsche Bank also stated:

A liberalized financial system is helpful in promoting consumption by normalizing interest rates, thus ending the transfer of funds from depositors to enterprises. This will reduce over-investment and excessive competition, as capital is rationed, which will benefit the return rates of state-owned enterprises. We expect that as state-owned enterprises improve their return rates, there will be a demand to alleviate excessive competition to enhance stock values. We anticipate that this will become a key topic in 2025, and this factor will be a key driver of the 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, the UAE, and Saudi Arabia increasing by 23%, 19%, and 18% respectively, and a 13% growth in exports to ASEAN countries within the "Belt and Road" initiative. China's exports to ASEAN and BRICS countries now equal the total exports to the United States and the European Union, with the market share of exports to these destinations growing 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 has world-leading companies in almost all industries and is continuously gaining market share.
2. The "Belt and Road" initiative: This initiative opens up regions such as Central Asia, West Asia, the Middle East, and North Africa, expanding China's potential market
3. Automation leadership: About 70% of industrial robots are installed in China, driving productivity advantages.
4. Domestic demand potential: Household savings growth has slowed to twice the nominal GDP growth rate, but since 2020, savings have increased by $10 trillion, and these savings are expected to flow into consumption and the stock market in the medium term.

US-China trade issues may bring positive surprises; trade and markets are not so closely related

According to previous reports from 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 prioritize tactical victories over maintaining ideologically challenging positions.

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

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

A decline in exports may actually drive the stock market up for a period. China's dominance in various industries has been achieved through excessive investment in many areas. If supply can be restricted, it may 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 and increase their allocation to the Chinese market. The Hong Kong/China stock market is expected to continue leading global markets in the medium term, maintaining strong performance into 2024.

We believe global investors often underweight China severely, 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 favor leading companies with moats cannot ignore that today, Chinese companies have broad and deep moats, rather than Western companies.

As Chinese companies continue to solidify their dominance globally, the valuation discount of the Chinese story seems likely to eventually turn into a premium. We believe investors will have to quickly turn to China in the medium term, and it will be difficult to acquire Chinese stocks without driving up prices. We have been optimistic before, but have been puzzled about what factors would prompt the world to awaken and buy; we believe China's "Sputnik moment" (or dominance in the electric vehicle sector) is that factor