Newsletter commentary Jan 2025

The market remained volatile in January. After the consolidation by the end of last year, the lack of new bullish signals led to a cautious sentiment in the market. However, the prices of some companies with high index weighting and good performance were close to the level they were in September, while most of the adjustments mainly concentrated on the overvalued, thematic trading stocks.

January coincided with 2025 Chinese New Year, and there are a few developments deserve more attentions,

1.       Proactive Fiscal Policy

The impact of proactive fiscal policy, which started to be implemented in Q4, was quite evident. We see the pace of bond issuance was rapid, and the balance of fiscal deposit was also declining, indicating that funding was truly being disbursed. The real economy will realize the sustained effects of these fiscal policies over time. China’s Q4 2024 GDP also performed well, with exports consistently exceeding expectations. Chinese exports have been repeatedly underestimated in previous years, largely due to market’s lack of confidence in Chinese export’s competitiveness. Infrastructure investment also saw a rebound, and the real estate industry chain showed signs of stabilization. We believe the market has underestimated the impact of Chinese fiscal policy shift.

2.       The Shockwave from DeepSeek’s Model Release

In January, DeepSeek’s AI model launch had a significant impact on the global AI landscape, triggering global investors to reassess China’s AI capabilities even under a restricted resource environment.

The revolutionary model also prompted global investors to rethink the path of AI development, sparking strong market reactions regarding new possibilities for AI investment and returns. Previously, the global spotlight was on the large-scale AI model. If we grade the performance distribution of large-scale AI model globally from 10 points to 90 points, China has now raised the baseline to 80 points with a very low cost. Since an 80-point model is already sufficient for application in many fields, this poses a significant challenge for the 90-point model to reevaluate the investment and return.

Accordingly, the assumption that the U.S. leads other countries far behind in AI doesn’t entirely hold up. If a truly all round AGI cannot be there, the difference between a “98-point AI” and a “95-point AI” might not be that critical. China’s AI approach could hold greater commercial value as it has a large market size, strong engineering ecosystem and data advantage. China provides around 30% of global industrial capacity, Chinese assets is invaluable and irreplaceable asset and it has been quite undervalued at this moment.

3.       U.S. Tariffs

The Trump administration’s rigid idea of replacing income tax with tariffs may not fully work today. If “America First” truly translates into global taxation, it could quickly turn into “America Isolated.” A curious question is why Trump is so eager to pursue policies that most people see as unreliable, potentially damaging U.S. credibility. Perhaps the internal challenges he faces are greater than the market assumes. Meanwhile, the Biden administration’s stepping down even when U.S. achieving a record economic growth, shows that the internal tension is intense in the country.

The reshoring of U.S. manufacturing is a long-term process, but inflation will be an immediate concern. If global taxation is implemented, it may not necessarily be bad news for supply-rich countries. The U.S. economy has transitioned to a stage which mainly dominated by financial and tech capital, while now it seeks to return to manufacturing. But what will other countries trade in exchange? The U.S. distracting its domestic issues onto trade disputes is likely a deliberate misinterpretation.

The U.S. has long stopped selling certain technologies to China, while many seemingly ordinary Chinese products, if withheld, could cause significant short-term disruptions to global supply chains. And U.S. will eventually find the alternatives given a considerable amount of time. Unlike the strategic defense in 2018, China’s situation with the U.S. has evolved into strategic equilibrium today, and in some areas, strategic advantage. Applying trade policies from 100 years ago to the modern global supply chain is likely ineffective.

As a leader in the global division of labor, the U.S. must continuously expand new frontiers. If it fails to do so, it risks becoming just another player in the system. Currently, the U.S. struggles to push new boundaries and instead focuses on competing with allies and rivals for existing markets—this is a self-imposed downgrade. There is also the possibility that it may stem from the fear that it is easier for latecomers to develop lithography machines than for the U.S. to rebuild its manufacturing industry. This is similar to how some industry leaders, upon reaching their own growth ceilings, sometimes venture into unfamiliar product lines to block competitors, ultimately harming the entire sector’s value.

2025: A Year of Clarity and Reassessment

The year 2025 promises to be intriguing, as many long-standing uncertainties may finally be resolved, leading to the repricing of numerous global assets.

A Side Note: The Chinese New Year film box office saw a strong rebound this year, breaking the slump of 2024. The key takeaway is product, product, product. The author of the article has watched two films, Detective Chinatown 1900 and Ne Zha, during Chinese New Year. The quality of Chinese film creation and production has improved step by step, which all stems from the growing industrial strength. Once the industrial foundation is solid, cultural confidence will also grow. Many Chinese directors today have shown greater storytelling skills than most investors have realized.