The winds of fortune, particularly fickle on Wall Street, have undergone a dramatic shift concerning China. Barely into the second quarter of 2024, the narrative surrounding the world’s second-largest economy has transformed from one steeped in gloom to burgeoning optimism. It’s a turnaround stark enough to give even seasoned market watchers pause, prompting a re-evaluation of assumptions that seemed firmly entrenched just months prior. The despondency that clouded investor sentiment at the dawn of the year, fueled by a confluence of economic headwinds, appears to be dissipating, replaced by a tentative, yet tangible, resurgence of confidence.
Cast your mind back to the early days of 2024. China was grappling with the lingering shadows of the pandemic. Its much-anticipated economic resurgence felt disappointingly sluggish. Key challenges included:
- Anemic Consumer Activity: Domestic spending, a critical engine for growth, remained stubbornly weak, failing to regain its pre-pandemic vigor.
- Property Sector Anxiety: Persistent troubles within the vital real estate market cast a long pall over economic stability and broader financial health.
- Regulatory Overhang: The aftershocks of a sweeping regulatory clampdown, particularly targeting the nation’s influential technology giants, continued to dampen innovation and investor appetite.
This pervasive pessimism found a clear reflection in the financial markets. Hong Kong, traditionally the primary gateway for mainland Chinese companies seeking international capital, saw its initial public offering (IPO) pipeline run dry. The city’s benchmark Hang Seng Index became emblematic of the malaise, limping to the finish line of 2023 having recorded its fourth consecutive year of declines – a dismal streak that underscored the depth of investor skepticism. The term ‘uninvestable’ began to circulate with alarming frequency in discussions about Chinese equities.
The Tide Turns: A New Dawn in Hong Kong?
Fast forward to the present, and the atmosphere, particularly witnessed during Hong Kong’s recent ‘Mega Event Week,’ is markedly different. Gatherings like the HSBC Global Investment Summit and the Milken Global Investor Symposium buzzed with a renewed energy. High-profile banking and finance executives, hailing from global financial centers, articulated a consistent theme: they never truly lost faith in the long-term potential of China and its crucial financial hub, Hong Kong. The prevailing sentiment wasn’t just hopeful rhetoric; it was backed by tangible market movements.
Consider the performance of the Hang Seng Index. As of late 2024, it has staged a remarkable rally, surging nearly 20% year-to-date. This performance stands in sharp contrast to major global indices during the same period, including a roughly 3% dip in the S&P 500 and a more pronounced 5.8% decline in Japan’s Nikkei 225. This isn’t merely a broad market lift; specific Chinese corporate titans are leading the charge. Shares in household names like e-commerce behemoth Alibaba, electronics innovator Xiaomi, and electric vehicle leader BYD have all posted impressive double-digit gains, reclaiming significant ground lost during the preceding downturn.
This market resurgence hasn’t gone unnoticed by the arbiters of global capital allocation. Major Wall Street institutions are actively revising their outlooks and price targets for Chinese equities upwards. Their rationale points towards two key catalysts: increasingly positive policy signals emanating from Beijing and, perhaps more unexpectedly, the disruptive potential unleashed by a homegrown artificial intelligence contender, DeepSeek.
‘Absolutely it’s investable,’ declared Jenny Johnson, the chief executive of global investment giant Franklin Templeton, speaking unequivocally about China at the HSBC summit. Her sentiment captured the essence of the shifting perspective. Frederic Neumann, HSBC’s chief Asia economist, described the change in narrative as nothing short of ‘striking’ in conversations with Fortune, noting a palpable increase in both ‘optimism and interest in China.’
Bonnie Chan, the CEO of Hong Kong Exchanges and Clearing (HKEX), the operator of the city’s stock exchange, highlighted this transformation during the HSBC event. ‘Just a year ago, many international investors considered Chinese stocks uninvestable,’ she observed, ‘but their view changed in September, and many of them have started to increase their investments in Hong Kong and China.’ This renewed confidence is translating into concrete action. Hong Kong’s exchange is once again attracting significant IPOs from major Chinese corporations. A prime example emerged recently: CATL, a global leader in battery manufacturing and a key supplier to Tesla, received regulatory clearance for a potential $5 billion IPO in Hong Kong. If successful, it would represent the city’s largest public listing since the more buoyant days of 2021, signaling a potential reopening of the capital-raising channel that had seemed constricted.
The DeepSeek Phenomenon: An AI Catalyst for Confidence
Pinpointing the precise genesis of this rally is complex, but many observers point to a specific technological development as a pivotal moment: the emergence of DeepSeek AI. Launched in late January 2024, DeepSeek’s artificial intelligence model garnered significant attention for its combination of power, efficiency, and, crucially, affordability. Its arrival sent ripples through the global tech landscape, contributing to a reassessment of value that reportedly wiped around a trillion dollars from U.S. tech stock valuations while simultaneously adding comparable value to their Chinese counterparts.
DeepSeek wasn’t just another AI model; it served as a potent symbol. ‘DeepSeek was a shot in the arm for those looking to see confidence,’ remarked Kevin Sneader, Goldman Sachs’ President for Asia-Pacific ex-Japan, during the Milken symposium. He emphasized that this wasn’t merely about the technology itself, but about what it represented: China’s enduring capacity for cutting-edge innovation, even after periods of intense regulatory pressure.
The perceived significance of DeepSeek was amplified shortly after its debut. Its founder, Liang Wenfeng, was notably included in a high-level symposium with President Xi Jinping. He shared the stage with established titans of Chinese industry, such as Tencent founder Pony Ma and Huawei founder Ren Zhengfei. This gathering, characterized by Sneader as a ‘handshake’ meeting, was interpreted by many investors as a powerful, albeit symbolic, signal. It suggested that Beijing was perhaps softening its stance towards the private sector, particularly in strategic areas like technology, and was ready to champion domestic innovation once more. ‘Confidence does feel like it’s returned,’ Sneader concluded, reflecting the interpretation rippling through investment circles.
Yimei Li, the CEO of China Asset Management, echoed this sentiment, noting that DeepSeek served as a potent reminder to international investors that China’s technology sector possesses a deep wellspring of innovative potential. The narrative shifted from one dominated by regulatory risk to one acknowledging competitive strength.
This renewed focus on Chinese tech innovation is palpable. Clara Chan, CEO of the Hong Kong Investment Corporation (HKIC), observed during the HSBC event that international investors, including those based in the U.S., are now scrutinizing China’s tech landscape with far greater intensity. Furthermore, she noted a growing desire among these investors to leverage Hong Kong’s unique position – its blend of international standards and mainland proximity – as a strategic base for deploying capital into this evolving sector, often seeking collaboration with domestic financial institutions. The potential for Hong Kong to act as a bridge, facilitating global investment into China’s next wave of technological development, seems to be re-emerging.
Lingering Questions: The Consumption Conundrum
While optimism bubbles around technology and policy signals, significant questions remain about the broader health of the Chinese economy, particularly concerning domestic consumption. Revitalizing household spending is widely seen as crucial for achieving more balanced and sustainable growth, reducing reliance on investment and exports.
Since September 2023, Chinese officials have repeatedly signaled their intent to bolster the domestic market. Promises of stimulus measures aimed at encouraging consumers to open their wallets have been a recurring theme, reiterated following the important ‘Two Sessions’ political meetings earlier in the year. The rhetoric clearly acknowledges the need to boost internal demand, which has lagged considerably since the stringent COVID-19 restrictions were lifted.
However, the scale of the challenge is substantial. Economist Keyu Jin, speaking at the Milken event, provided stark context. She highlighted that consumption currently accounts for only about 38% of China’s Gross Domestic Product (GDP). This figure is ‘really very low compared to much more advanced economies,’ where consumption typically plays a much larger role. Jin also pointed to the significant disparities within China, noting the existence of ‘hundreds of millions of people in rural areas’ who lack the same access to essential services like healthcare, education, and social safety nets compared to their urban counterparts. Bridging this gap and empowering broader swathes of the population economically is intrinsically linked to unleashing greater consumer power.
Despite these hurdles, some financial leaders are adopting a decidedly long-term perspective. Ali Dibadj, CEO of Janus Henderson Investors, articulated this viewpoint at the HSBC conference. ‘It’s really hard to bet against any country that has 1.4 billion people,’ he stated, emphasizing the sheer scale of the potential market. He pointed to China’s ‘enormously successful history, lots of innovation, lots of motivation and, importantly, lots of incentives being created by the government’ as reasons for underlying optimism, suggesting that the current challenges might be navigable over a longer horizon.
HSBC’s Neumann suggested that while immediate miracles aren’t expected, investors perceive a ‘gradual’ evolution in Beijing’s approach towards stimulating consumption. The belief, he told Fortune, is that ‘there’s a structural shift happening in China, which might take several years—but there’s certainly something happening.’ This implies patience among some investors, who are willing to look beyond short-term data points towards a potential, albeit slow-moving, rebalancing of the economy.
Yet, skepticism persists. Stephen Roach, the former chairman of Morgan Stanley Asia and a long-time observer of the Chinese economy, offered a more critical assessment. In a recent interview with Bloomberg, he dismissed much of the official rhetoric regarding consumption as ‘more slogans than substantive actions,’ suggesting a significant gap between stated intentions and effective policy implementation. This underscores the ongoing debate and uncertainty surrounding whether Beijing possesses the political will and the right policy tools to engineer the desired shift towards a consumption-led growth model. The property sector’s unresolved issues also continue to weigh on consumer confidence and overall economic momentum.
Contrasting Fortunes: Shadows Over the U.S. Market?
The rekindled interest in markets like China and potentially Europe finds a contrasting backdrop in the current sentiment surrounding the United States market. While China experiences a wave of upgrades, concerns seem to be mounting for U.S. equities, which had previously enjoyed a long run of dominance, particularly in the tech sector.
Several factors are contributing to a more cautious outlook for the U.S.:
- Tariff Trepidation: The prospect of escalating trade tensions and tariffs, particularly linked to the political cycle and potential shifts in administration policy, creates significant uncertainty for global supply chains and corporate profitability.
- Inflationary Pressures: Stubborn inflation continues to be a major concern, potentially necessitating prolonged periods of higher interest rates, which can dampen economic activity and pressure stock valuations.
- **Wavering Consumer Sentiment:**Despite a relatively robust labor market, consumer confidence in the U.S. has shown signs of fragility, potentially impacting future spending patterns.
This cautiousness is reflected in market performance. Aaron Costello, Head of Asia for Cambridge Associates, highlighted a key risk factor at the Milken conference: ‘The single biggest risk factor in most people’s portfolios is U.S. tech.’ Indeed, the so-called ‘Magnificent Seven’ stocks, which drove much of the market gains in the previous year, have faced headwinds in 2024. As of the time of Costello’s remarks, many were in negative territory for the year, with significant pullbacks in giants like Nvidia (down over 20%) and Tesla (down over 30%).
The unpredictable nature of U.S. trade policy under the Trump administration adds another layer of complexity. Pronouncements on tariffs have oscillated, creating confusion and anxiety for businesses and investors. One moment suggests tariffs might be less severe than feared, only to be followed by unexpected levies, such as the proposed 25% tax on car imports or tariffs linked to oil imports from specific nations. The anticipation surrounding the unveiling of new, country-specific tariffs keeps markets on edge.
This environment has led some to question the future trajectory of global economic integration. HSBC Chairman Mark Tucker, opening his bank’s Hong Kong conference, offered a sobering perspective: ‘Globalization as we knew it may have now run its course,’ he suggested. ‘What used to be sustainable no longer is.’ This reflects a broader acknowledgment that geopolitical tensions, protectionist impulses, and supply chain realignments are fundamentally reshaping the global economic landscape, creating both risks and, potentially, new opportunities in regions previously overshadowed by U.S. market dominance. The renewed focus on China, despite its own set of challenges, can be partly understood within this context of diversification and a search for growth in a shifting world order.