On September 13-17, 22V held its third annual China investor trip: four days of meetings in Beijing and Shanghai with leading tech firms, economic officials, policy advisors, and members of the business community.
The clients on the trip had two overarching takeaways:
- Impressed with tech and advanced manufacturing. Clients came away viewing Chinese open-weight models as likely to remain a source of margin pressure for US frontier AI companies.
- Unimpressed with China macro. A continued push on local debt deleveraging will drag on growth for at least the next two quarters. Beijing’s limited urgency to boost domestic demand means a continued reliance on exports for growth, a challenge for the global economy – especially Europe, where there was broad consensus among contacts that a slow-burn trade war will soon begin.
TECH
AI and Robotics:
We visited two prominent tech unicorns – in LLMs and humanoid robotics – as well as Xiaomi, whose business spans electric vehicles, smartphones and appliances and has a competitive LLM.
- China’s AI sector is still compute-constrained, particularly when it comes to advanced GPUs for training. There is growing optimism that domestic chipmakers will be able to overcome key technology bottlenecks around 2029. In the meantime, AI labs are battling with each other and Chinese hyper-scalers for access to compute, with Beijing playing a role in allocating these resources. Chip constraints as well as fiscal discipline (see further below) mean that domestic AI capex in coming quarters will remain modest relative to the US.
- Contacts cite China’s AI sector as having other unique advantages, including: enabling infrastructure (access to land and low-cost energy for data centers); a deep pool of talent, with many top AI academic researchers leading private AI labs; the open-weight ecosystem; and China’s strength in hardware manufacturing, which facilitates integration of AI in robotics as well as consumer devices.
- Tech firms readily concede that US firms will likely retain the lead in the most advanced LLMs but are confident that Chinese firms will be highly competitive in agentic applications. In a climate of intense competition, AI firms are seeking different niches in a bid for profitable business models. Two of the firms we met with are focused on LLMs for use across consumers’ hardware ecosystems – smartphones, cars, and home appliances. This strategy rewards firms with a suite of efficient multimodal models rather than a single powerful model. The goal is a flywheel in which the models improve through access to the data gained by mass deployment on devices.
- Contacts expect a broadly industry-friendly regulatory approach – and see little chance of Beijing agreeing to a mutual AI slowdown. Economists as well as tech firms assess that AI is already reducing hiring demand for white collar jobs in China. Chinese agencies are studying measures to address potential job losses from AI and have stepped in to the slow the rollout of robotaxis in response to protests from drivers. Nonetheless, contacts broadly expect Chinese authorities to continue to prioritize AI diffusion as the top policy goal. Contacts see little prospect of Beijing agreeing to slow down AI development as part of an agreement with the United States.
- Humanoid robotics companies are still several years away from the level of embodied intelligence necessary to deploy in practical settings. A leading robotics startup derided most bipedal robots now capturing media attention as capable of “performances” through impressive movement skills but lacking the intelligence for real-world use cases such as sorting packages. The firm sees relevant training data as the key bottleneck for more sophisticated models, which are likely 2-3 years away from creating the flywheel of real-world deployment leading to increased data collection and improved intelligence.
Electric Vehicles:
- Our visit to Xiaomi underscored the competitive threat for foreign automakers, even at the premium end of the market. Xiaomi’s almost fully automated “dark factory” (which is actually quite well-lit) has become the must-see tourist stop in Beijing after the Great Wall. As a spectacle of manufacturing prowess, it does not disappoint. Xiaomi is preparing to launch its line of electric SUVs in the European market in H2 2027 – starting with Germany, the team told us, as a test of whether Xiaomi can compete in the toughest part of the market. To do so it will need to navigate tariff tensions and data security policies, and find dealers and service partners. Still, the visit was a vivid look into the stark challenge facing European automakers from Chinese EV brands – on performance as well as price. Xiaomi and its peers can leverage a unique domestic supply chain ecosystem (especially for batteries), a massive push in industrial automation, and sophisticated AI-enabled software applications. These firms are battling each other intensively in an oversupplied domestic market and hunting for profits overseas.
MACRO OUTLOOK
In contrast to the dynamism in AI and hi-tech manufacturing, the visit gave few reasons to expect that domestic demand will meaningfully improve in the next several quarters.
- Despite subdued growth and employment, Beijing is content to ride hi-tech exports and not stimulate domestic demand this year. While many headline growth figures look as weak today as in 2024, no one expects a “policy pivot” from Beijing anytime soon. Hi-tech exports, benefiting from the US AI boom and the global energy transition, are carrying growth and show no signs of losing momentum. Unlike in 2024, there are thus far few acute signs of rising social stability pressures. With the bureaucracy already focused on policies for next year, the nearest turning point on policy is likely to be the March 2027 National People’s Congress.
- Local government deleveraging will remain a key headwind for infrastructure investment and broader growth until at least mid-2027. Next fall China will hold the 21st Party Congress, with a new round of personnel appointments for a five-year term. Local officials have received the clear message from the leadership that their promotions rest first and foremost on continued progress in managing their debt problems, rather than supporting growth. Beijing has set a deadline of mid-2027 to resolve debt of local government financing vehicles (see our coverage HERE). Some contacts are modestly optimistic that China’s policy-lending program to fund the “six networks” (including AI-related infrastructure), which finally started to translate to real spending in September, can support investment growth in coming quarters. However, overall expectations are low given the prevailing political directive on deleveraging.
- Ambitions for direct consumption support have faded, while labor market dynamics are punishing. Policymakers and even policy advisors believe there are few practical measures to directly boost consumption growth; at most, they argue that Beijing should focus on supporting investment to revive labor demand and job growth. The lack of reliable labor market statistics is a major blind spot (even for policymakers), but weakness is clear. Estimates suggest that more than 310 million workers – almost half the labor force – are in flexible short-term work contracts. This includes delivery workers in the platform economy but also a growing share of manufacturing employment. One recent motivation for the use of gig contracts in the tech sector is that employers want the flexibility to replace jobs made redundant by AI without facing legal and political blowback. Tech contacts and labor market experts report that AI is not causing major layoffs yet but has reduced hiring demand – mainly for white collar workers. This will exacerbate high unemployment rates for college graduates, whose supply continues to expand.
- Excess capacity and deflationary pressures are likely to persist. One prominent think tank has become more optimistic that China’s industrial cycle has bottomed due to capacity reduction and is set for sustained reflation – at least, once the headwinds of local government deleveraging alleviate. However, most contacts still see the economy as suffering from an imbalance of supply over demand, with firms having limited ability to pass on higher commodity prices to consumers. Our own travel expenses on the trip confirmed that prices in China, particularly for services, remain very cheap.
FINANCIAL AND COMMODITY MARKETS
- Oil Markets: China retains flexibility in navigating high prices, but crude imports will resume to meet domestic needs. Contacts expect China’s crude imports to gradually recover over the course of Q4 but remain below average 2025 levels. China has run down commercial inventories of refined product since the outbreak of the war; inventory levels are not dire, but low enough to require renewed imports and refinery runs to ensure domestic supply of gasoline, diesel, and petrochemical feedstocks. The biggest swing factor for China’s crude import demand is the extent to which Beijing permits refiners to export refined product. One commodity-focused China research firm reports market speculation that the October refined product exports quota could be cut significantly. They also noted that China’s administratively set prices for oil products are lower than what global prices would imply. This is a clear signal that Beijing wants to insulate the domestic market from high oil prices, which implies a readiness to restrict exports as necessary to maintain ample domestic supplies.
- Exchange rate: Our conversations suggested little reason for strong CNY appreciation in the near term. Factors in support of a stronger CNY include: China’s large trade surplus; low inflation and high productivity growth compared to trade partners (enabling appreciation without losing export competitiveness); and cheap currency on a purchasing power parity basis. However, interest rate differentials between China and the US are a source of depreciation pressure and are likely to widen as the Fed hikes. Fundamentals aside, the CNY remains heavily managed by the authorities, who are likely to allow gradual appreciation but will be very wary of sudden reversals. We believe President Xi’s visit to the US this week has led the authorities to promote or tolerate appreciation in recent weeks, which will likely be temporary; we do not see the PBOC using appreciation as a tool to reduce China’s trade surplus. In short, the balance of factors suggests a strong preference for overall exchange rate stability.
- Chinese Equities: Tech IPOs will continue to be the focus for mainland and HK markets. The domestic authorities are determined to support IPOs in the A-share market – particularly “hard tech” IPOs such as in semiconductors – while policing the pace and quality of these firms given the political sensitivities of what is still a retail-dominated investor base. The Hong Kong market provides a financing outlet less subject to these concerns. That said, outside of tech themes, contacts do not expect major near-term catalysts for the broader markets given a subdued profit outlook in most sectors.
GEOPOLITICS
We outlined the key takeaways for US-China geopolitics in a short note last week (see HERE). These include:
- Overall confidence in Beijing in the outlook for US-China relations. The view is that Beijing’s rare earths deterrent and other supply chain resilience give it significant leverage to push back on US coercive policies.
- Consensus that the China-Europe relationship will soon see a slow-burn trade war. Contacts are not concerned that this will have an acute impact on China’s overall exports.
- An expectation that Beijing will continue to urge deescalation in the US-Iran conflict but not play a decisive role in ending the conflict.
