China's AI Stock Rally: Why Goldman Sachs Thinks It Still Has Legs
China's AI surge isn't a bubble, according to Goldman Sachs' chief China equity strategist, Kinger Lau. His view: valuations are still reasonable, and earnings power has room to expand as Chinese firms double down on AI applications rather than pure computing power.
The core idea is simple. If companies can monetise real-world use cases-enterprise tools, consumer services, productivity upgrades-earnings follow. That's where China's approach is leaning, and investors are responding.
Valuations: Big Gap vs US Peers
China's top 10 tech firms are worth about US$2.5 trillion combined. Their US counterparts sit near US$25 trillion-a 10x gap.
In index terms, US tech heavyweights make up roughly 40% of the S&P 500's market cap, while China's top tech names account for about 15% of the broader market. If AI applications translate into revenue, there's room for multiple expansion without stretching credulity.
Momentum has been helped by efficient, low-cost models from firms like DeepSeek and a steady stream of new tools from Big Tech. The market wants proof of monetisation, not just hype.
Timing and Earnings: 18 Months Behind, But Catching Up
Lau estimates China's AI investment cycle is about 18 months behind the US. That lag can be an advantage if it means learning from what's working and skipping what's not.
Goldman Sachs expects Chinese corporate earnings to grow 12-13% next year, up from 2-3% this year. Valuation re-rating is likely to cool to roughly 5-10% after a strong rebound, with a 30% upside for Chinese equities by 2027 if earnings compound.
The MSCI China Index has already seen a 48% price-to-earnings recovery from late 2022 lows. The next leg likely relies more on earnings than on multiples.
Policy, Flows, and Global Reach
AI is a priority in China's latest five-year plan, a framework that historically hits about 90% of its targets. That policy support tends to pull in capital and compress execution timelines.
Flows matter. Southbound net inflows hit a record US$130 billion this year and could set another high next year. Retail investors are shifting from property into equities, while institutions face pressure to increase onshore allocations.
Chinese firms generate roughly 15% of revenue overseas, compared with about 30% for US companies. That gap is opportunity-especially for AI-enabled products that can scale across borders.
Investor Takeaways
- Focus on application-layer names with clear paths to monetisation (enterprise software, productivity, vertical AI tools).
- Watch earnings capture: user growth is nice, paid adoption is better. Prioritise ARPU and contract wins over headline downloads.
- Look for firms expanding overseas revenue share from the ~15% base; distribution and partnerships matter.
- Track inference demand and AI spending in customer industries (finance, retail, manufacturing) for second-order signals.
- Use policy as a tailwind indicator: alignment with five-year plan priorities raises odds of sustained investment and support.
- Monitor flows: persistent southbound and institutional allocations can extend the uptrend and dampen drawdowns.
- Stay realistic on timelines: with an 18-month lag to the US, expect a staged payoff as deployments scale.
Key Numbers to Keep on Your Dashboard
- Market cap: Top 10 China tech ≈ US$2.5T vs US ≈ US$25T.
- Index weight: US tech ≈ 40% of S&P 500; China tech ≈ 15% of domestic peers.
- Earnings growth: 12-13% next year (vs 2-3% this year).
- Valuation: Re-rating likely 5-10% after a 48% P/E rebound since late 2022.
- Cycle timing: AI investment ≈ 18 months behind the US.
- Flows: Southbound net inflow record ≈ US$130B this year.
- Global revenue mix: China ≈ 15% overseas vs US ≈ 30%.
- Outlook: ≈ 30% upside for Chinese equities by 2027, contingent on earnings delivery.
Bottom Line
This isn't a price-only story. If Chinese AI leaders keep executing on applications that customers pay for-and policy support plus capital flows stay intact-there's room for both earnings and multiples to climb from here.
Where to Go Next
For index context, review the MSCI China Index.
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