As President Trump heads to China, it is fair to ask whether the Chinese stock market is a bargain.
Chinese equities outperformed in 2024, and again in 2025, even while the S&P 500 continues to hit new highs. What is going on?
Recall that Cold War 2.0 with China started in 2018 with the semiconductor embargo by the first Trump administration against China.
For China, this embargo was a wake-up call. Essentially, for six years after 2018, China has shifted financial resources away from consumption and property markets and towards de-Westernizing supply chains. As China did this, property and equity prices collapsed, and China’s stock market became an unattractive destination.
AI has perhaps shifted perceptions.
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Last week, four tech giants, Alphabet, Amazon, Meta and Microsoft, representing 22% of the S&P 500’s market value, reported strong quarterly earnings that highlighted the importance of AI. But all these stocks are a bit on the pricey side.
In addition, while you might think the above companies and their AI brethren are “asset-light” companies, you would be very wrong.
I recently attended the SAFE Summit in Washington. The focus was on electricity and artificial intelligence (AI), but the real mission and topic of discussion was the critical mineral inputs that go into generating electricity, as well as the myriad of other critical inputs, such as semiconductors.
For some time, the U.S. stock market has rewarded asset-light, high-margin, low-capital models such as software and financial engineering. Meanwhile, China has focused on hard physical assets that are at the core of manufacturing, such as commodities, grid and transportation infrastructure, power plants, shipbuilding, smelting, mining, and refining.
I will spare you the plethora of depressing statistics highlighting how far we have fallen behind in almost all these areas. Even in nuclear power, where we led the world, China is building nuclear reactors twice as fast and at half the cost that we can.
Washington and Wall Street are waking up to the reality that AI, electrification, defense, and deglobalization are all vulnerable to the same bottleneck – the physical world. AI data centers require land, steel, power, copper, turbines, transformers, grid connections, and all this requires staggering amounts of capital. And the physical world cannot be coded into existence by AI; it must be financed, permitted, drilled, mined, and processed at a competitive speed, scale, and price.
And as technology advances, the complexity and chemistry of commodities moves at a startling rate. When Steve Jobs made the first Apple phone, it had about 18 elements in the periodic table. The new iPhone 17 has around 74 elements, including nine rare earths. The irony is that while AI may very well be the fastest-growing category in world history, China has used its dominance in rare earths for permanent magnets to push back on U.S. tariffs. China only exported about $2.9 billion of magnets in 2024, less than one percent of the country’s $3.6 trillion total exports.
In short, critical minerals are no longer seen as just commodities; they are national security inputs. Many “heavy-asset” stocks have already made a nice move, but we will be alert to opportunities in these sectors.
Over time, the tech stock-dominated chart (below) may include more of these companies. What is more surprising is the relatively weak performance of Chinese and Japanese stocks reflected in their current market value.
The graphic above highlights stark American stock dominance. The following shows China’s underperforming stock market over the last decade in a clearer light.
And here is a stunning statistic from The Economist.
Tesla (TSLA) workers in Shanghai produce twice as many cars per worker as they do in California.
Finally, the charts above reflect that the market value of China’s stock market is about 10% of America’s publicly traded stocks. Is it a buy right now? Join the Cabot Explorer today to find out our take.
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