Our Equities Team has just returned from ten days in China meeting companies at the forefront of automation and AI deployment. The trip consisted of institutional investors from Australian and overseas, including representatives from a number of Australian superannuation funds. In this paper, we explore a broad range of emergent themes through the lens of company and industry engagement.
There was a nice coincidence to the timing of our trip, with respect to the Made in China 2025 (MIC25) industrial policy enacted in 2015. While the Chinese Communist Party (CCP) may have de-emphasised the lexicon of MIC25 given geopolitical sensitivities, it was very evident from our short visit just how significantly some focus industries have been transformed, such as EVs, renewables, robotics and high-speed rail. While notably falling short (at least to date) when it comes to the most advanced semi-conductor chip manufacturing (e.g. Nvidia), the pace and scale of China’s value chain progression must be seen to be believed, with US export controls seemingly accelerating the long-term innovation agenda. However, we’ve also seen the downsides to this unwavering commitment to MIC25 in the form of subsidy induced overcapacity.
In the longer-term we expect the broad cross-sector innovation trend in China to reshape cost curves and increase productivity if the government’s supply side reform intentions can achieve their objectives. Of course, there are many valid counterpoints to this view when considering structural challenges to China’s ongoing economic development, including the undeniable task of rebalancing the country’s growth model. We recognise the big structural challenges (e.g. geopolitical tensions, industrial overcapacity, ongoing property price declines, high youth unemployment, adverse demographics and substantial total debt), whether in combination or isolation, (e.g. geopolitics) are likely to continue to sideline many long-term offshore investors.
China’s overcapacity in some key sectors, which is highly deflationary and capital destroying, is also a contributing factor to its massive trade surplus, which recently topped US$1 trillion for the first time (first 11 months of 2025). Rather than helping to progress China toward greater self-sufficiency, the government’s incentives and R&D tax credits may ultimately inhibit the long-term benefits of China’s innovation agenda, particularly within heavily supported industries. The resulting competitive intensity (so-called ‘involution’) in sectors such as EV manufacturing is driving intense price wars and in turn, shrinking profit margins. Ironically, the government’s incentives and R&D tax credits may ultimately stifle long-term innovation in the broader value chain within heavily supported industries (e.g. the global race to develop solid-state (SS) batteries), and broader economic goals of increased consumption spend engendered from the development of higher value-adding industries. Potentially the end justifies the means, and China wins the long game by developing fully integrated national champions destroying the competition. This could see global Chinese winners like CATL emerge within other key sectors (even if the US market remains relatively closed), with less efficient operators allowed to fail (or likely consolidated) as incentives are ultimately unwound.
However, in all likelihood, this will only delay the consumption pivot and the need for genuine supply side reforms, which is increasingly recognised. The damaging nature of involution (e.g. profitless growth) was recognised by China’s Central Financial and Economic Affairs Commission (CFEAC) on July 1 this year, which outlined the importance of taking action to tackle “disorderly low-price competition” – effectively anti-involution reforms. These objectives were seen by some to be lacking in clear actions, which are more easily achieved within the more commoditised, state-owned enterprises (SOE) dominated sectors (via production quotas, pricing floors), relative to what would be a comparatively more difficult task within today’s much larger private sector. Notwithstanding, the potential speed of a policy pivot to address such a key issue (now publicly acknowledged) across both public and private enterprise, should not be underestimated. This speed leads to both the good and sometimes bad outcomes of China’s centrally planned governance model.
Foreign criticism of China’s industrial policy is often aimed at this exported excess capacity in the form of global deflation, reflecting the reality of insufficient domestic demand. This is one of the key underpinnings of escalated trade tensions that became so real on ‘Liberation Day’. The objectives of MIC25 are clear – transform China into a global leader in advance manufacturing and in turn reduce the reliance on foreign technology. However, the West’s response to the effects of this exported deflation on its economy remains unclear. As is the societal impacts on China’s own people, given a potential collision course between Made in China’s long-term objectives; shrinking profit pools; workforce re-shaping; and rising total debt. The same points of tension could apply equally for the West and the US, which may itself be on an unsustainable path in trying to navigate the uncertain trade-offs of rapid AI-driven innovation, geopolitical trade tensions, national security, energy transition, excessive government debt and ultimately, societal needs and wants.
It is natural to be ‘wowed’ and even inspired by China’s rapid industrial transformation (as we were), while potentially downplaying what is happening in the real economy and the big structural challenges. At the same time, perhaps things are starting to stabilise when considering broader measures such as consumer sentiment indicators as a sign of improving confidence in both the economy and the government’s policy direction (along with what we observed on-the-ground). We would also call out potentially thawing geopolitical tensions and positive signs of a government policy pivot towards genuine supply side reforms. Some of China’s new growth exports, including key components of decarbonisation (e.g. EVs, lithium-ion batteries, solar panels and other clean energy inputs) and high-end manufacturing (e.g. rare earths, electronics and advance machinery) are exhibiting strong resilience in the face of US tariff upheavals, which also bodes well.
Equally, it is not surprising and perhaps prudent (given weak near-term economic momentum and the structural challenges highlighted) that global investors have maintained limited appetite for China’s vast bottom-up opportunity set (yes, I’ve been sipping the baijiu Kool-Aid). But it bears repeating that diversification of most global equity portfolios (and for that matter domestic portfolios) remains extremely limited, both by drivers and geographically. At a minimum, China’s influence will be profound for all asset owners over the long-term (even indirectly) and in our view justifies a closer, first-hand perspective when contemplating the broader implications of these key questions.
Read our comprehensive paper which explores key actions and themes observed during the trip. Frontier would be pleased to provide clients with a more detailed breakdown of our China trip takeaways, whether their starting point is negative, positive or somewhere in the middle. However, we also welcome engagement in the broader context of emerging markets and developed markets portfolio construction and active risk budgeting. These elements will also form part of our upcoming International Equities Configuration Review (February 2026), where the key area of focus will be a re-underwriting of our emerging markets views. Separately, we are also able to support clients should they wish to undertake China-specific manager due diligence.
