China’s back in the AI game: should investors be paying attention?

China got some good news last week, and they needed it. Once a favourite market for investors' portfolios, the Hang Seng Index is down nearly 5% this year, and 8% over the last five years. But in the past month, investors seem to be singing a different tune.

A June export report showed a 27% increase in the year for China, and the Hang Seng increased 6% in the month to 22 July. Like most of the stock market momentum seen in recent years, the boost for China is linked to AI.

Much of this growth comes down to semiconductor exports as prices jumped like they did across emerging markets. But what caught media attention was the release of Kimi K3, a new model from start-up Moonshot AI.

Kimi K3 has brought a combination of excited buzz and controversy. Some US officials from the Trump administration claim that the model was stolen from Anthropic, owner of the Claude chatbot. But what’s becoming clear to companies is that it’s offering similar abilities to the top models from Anthropic and ChatGPT for a fraction of the price and computing power.

Like many of its American competitors, Moonshot is not listed on the market, though it seems to be eyeing an early 2027 IPO. This has made for a mixed reaction on the Hang Seng, where those in the AI supply chain rose, and listed competitors like Alibaba and ByteDance took a tumble.

On the other side of the coin, the problem it creates for markets like the US is two-fold. It not only creates competition for other models, but it means less demand for spending on chipmaking because the models can function on less computing power. This creates worries for companies like Nvidia. Interestingly, the design of Kimi K3 requires a large amount of memory, leaving more recent emerging markets darlings like Samsung and SK Hynix in a more comfortable position.

Déjà vu? Us too

A siege of tariffs from the Trump administration put a bit of a silencer on China’s AI innovation. But before they came into place, DeepSeek emerged as a new rival in the AI space at the end of January 2025. This caused a sharp, but short lived, tumble for the tech-heavy Nasdaq index. MSCI China, however, enjoyed an 11.5% gain in February.

Despite the immediate market reaction, what this ended up meaning for users in the long term, and therefore, investors, was less dramatic. According to research from MIT’s Mert Demirer, cheaper, open-source AI models make up just 30% of use, though they cost 90% less. Corporations also tend to stick to a certain model, which makes sense in practice: companies won’t constantly chop and change their AI preferences because of contract complexities and employee familiarity.

It’s too early in the life of AI to claim any certain patterns, but it is worth a thought for investors planning to jump on the cheaper AI trend.

What about the tariffs?

A massive deterrent for investment in China in the past year or so has been tariffs imposed by the Trump administration. This has created difficulty for Chinese AI companies in accessing the latest chips from leaders like Nvidia. But, in time, a series of workarounds have developed allowing China to access much of the same technology, and maintain relationships with other trading partners such as Vietnam, Japan, South Korea and India. Despite the tariffs, the US still takes over 10% of Chinese exports.

The 27% export increase in the year to June is giving investors yet another piece of evidence that China is continuing to grow its exports at larger than expected rates despite tariffs. New research from Chatham house pointed out that China’s year-on-year growth rate for exports has risen about 15% each year since 2023, the rest of the world is averaging closer to 5%, meaning China has a growing piece of the pie.

What’s happening in China?

While the export numbers look strong, the picture at home is continuing to look worse for China, likely fuelling some of the investor apathy towards the region. The Chinese population is saving at an extremely high and increasing rate.

The National Bureau of Statistics of China recorded that urban households now have a savings rate of nearly 40%. For perspective, the UK’s savings rate was a bit below 9% in the beginning of 2026. Savings may sound good from a personal perspective, but it means a lack of spending which is creating serious problems for the Chinese economy and businesses that profit off the home market.

China is also facing a property market collapse, with real estate investment dropping about 44% in the past five years, according to the Asia Society Policy Institute. This is double the drop that happened in the US following the Great Financial Crisis.

So, where does that leave Chinese businesses? The largest stock in the MSCI China Index, Tencent, has fallen 30% so far this year, which makes sense considering around 88% of the company’s revenue comes from mainland China.

A handful of funds focused on investing in China have been able to produce bumper returns in the past year, but performances have been rocky. These are the top-performing funds in the Investment Association China sector.

China has been able to beat the worries around tariffs, but their problems at home still loom large. The country’s innovation around AI may tempt investors and does have the chance to deliver large returns. But investing more broadly in China creates exposure to a complicated economic environment.