Goldman Sachs: AI may bring $200 billion net buying to the Chinese stock market

The emergence of DeepSeek-R1 and other recently launched globally competitive and cost-effective Chinese AI models are changing the narrative of the Chinese stock market.

Goldman Sachs noted in its report on February 17:

Widespread adoption of AI could increase the annual earnings per share of Chinese companies by 2.5% over the next decade, improving growth prospects and boosting confidence, which may raise the fair value of the Chinese stock market by 15-20%, potentially bringing in over $200 billion in capital inflows (with southbound funds contributing $104 billion), and is expected to partially reverse the underweight status of global asset management institutions.

In the past month, DeepSeek has triggered a 27%/19% increase in the Hang Seng TECH Index/MSCI China. In comparison, since the launch of ChatGPT in November 2022, the U.S. stock market has risen by 50%, adding $13 trillion in market value.

Furthermore, Goldman Sachs has raised its targets for MSCI China/CSI 300 to 85/4700, indicating a potential upside of 16%/19% over the next 12 months.

AI-Driven Dual Enhancement of Chinese Corporate Earnings and Valuation

Goldman Sachs stated that AI technology is profoundly impacting the profitability of Chinese companies through three main avenues, with widespread AI applications expected to increase China's earnings per share (EPS) by 2.5% annually over the next decade.

1. Productivity Leap: AI is expected to bring a cumulative 9% productivity growth to China over the next decade. If companies can effectively leverage AI technology to enhance labor productivity, the annual earnings growth of MSCI China index constituents is expected to increase by 1.1%.

2. Cost Efficiency Optimization: The application of AI technology in automation and labor optimization can help companies achieve a 3% reduction in labor costs, thereby enhancing total earnings by 1.8% annually over the next decade.

3. Emergence of New Revenue Opportunities: AI technology is giving rise to entirely new business models and incremental value, with Chinese companies expected to achieve approximately 1% additional earnings growth annually over the next decade through increased technology investment.

Capital Flow Amid the AI Wave: $200 Billion Net Buying Potential

Breakthroughs in Chinese AI models like DeepSeek are attracting global capital attention.

Referring to the U.S. experience, over the past year, U.S. and international investors have net bought approximately $660 billion in U.S. stocks, driving the S&P 500 and Nasdaq indices up by 20% and 24%, respectively, adding over $10 trillion in market value.

Although it cannot be simply assumed that the U.S. experience applies to China, the optimism brought by DeepSeek has begun to drive capital inflows into the Chinese stock market. Hedge funds are increasing their net and total exposure to China from low points, and southbound investors are actively buying Chinese tech stocks listed in Hong Kong Goldman Sachs expects:

If the total market value of Chinese companies increases by USD 3 trillion within the next 12 months, and based on the ratio of net capital inflow to market value creation in the U.S. market, the Chinese AI story is expected to attract up to USD 200 billion in net purchases (including expected southbound funds of USD 104 billion), which will help reverse the conservative and underweight stance of global asset managers towards Chinese stocks.

Goldman Sachs also pointed out:

The breakthrough of DeepSeek has catalyzed the recent strong rise in the Chinese stock market. Unlike the brief rise driven by policy changes last September, this technological breakthrough is more micro and innovation-driven, positively impacting both valuation and earnings, thus the recovery may be more sustainable.

Goldman Sachs raised the 12-month target prices for the MSCI China and CSI 300 indices from 75 and 4600 to 85 and 4700, respectively, indicating potential upside of 16% and 19%.

In addition, Goldman Sachs categorizes all Chinese listed companies into two main categories—AI technology and non-technology—and further subdivides them into six thematic groups—semiconductors, power and infrastructure, data and cloud, software and applications, revenue growers, and productivity enhancers—to analyze the characteristics within the AI ecosystem. Similar to the U.S. cycle, China's semiconductor and AI infrastructure have already performed well, indicating strong potential for late-cycle beneficiaries to catch up.

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