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Why U.S. Tech Stocks Could be the Big Winner of the U.S.-China Rivalry

The U.S.-China rivalry continues to simmer, and as China makes its priorities crystal clear, one winner could emerge: U.S. tech stocks.


One reason China is a much more formidable and resourceful opponent than America’s previous rivals is because technology plays a much more crucial role in the 21st century. By technology, I mean the entire supply chain, from rare earths to supercomputers and from fintech to big data. But U.S. tech stocks could be the biggest beneficiary of the U.S.-China rivalry. More on that in a bit.

While the Soviet Union was no match for America in technology, China is already a peer competitor in many areas and is developing talent and products at a torrid pace. For example, in 2000, China had none of the world’s five hundred fastest supercomputers. In 2020, it has 219 while America has 116.

China now graduates three times more computer scientists each year than America. In turn, America graduates only about half as many mechanical engineers as Germany each year - even though Germany has a population only one-quarter of America’s. China and India graduate the most engineers each year, about 600,000 and 350,000 per year, respectively, dwarfing America’s 70,000 graduates, of which about 40,000 are mechanical engineers.


China’s Priority: “Never Deindustrialize”

In the last year, Beijing has made it crystal clear just what sort of technology is their priority.

It is not e-commerce or digital platforms such as Alibaba (BABA), TAL Education (TAL), or the Uber of China, DiDi Global (DIDI), which launched an IPO in mid-2021. China sees these companies as lower priorities because they don’t make any technology hardware and don’t add much in terms of power to the Chinese state and economy. This is why, without hesitation, the party was willing to block Alibaba’s spin-off Ant IPO, crush TAL’s stock by reining in for-profit education, and punish DiDi founders and shareholders for going ahead with their New York Stock Exchange IPO despite warnings from Beijing regarding cybersecurity.

Management of these and other companies that get in the crosshairs of Chinese regulators have no choice but to capitulate. As one education tech executive told the Financial Times: “What are we supposed to do? We can’t fight the Communist Party.”

Secretary Xi Jinping made clear China’s technology sector priorities earlier this year by declaring that while digitization is important, “we must recognize the fundamental importance of the real economy… and never deindustrialize.”

Chinese trademark applications in recent years have surged, and in the first half of 2021, the U.S. patent office (USPTO) received 77,305 filings from China. This represents about half of all filings by American businesses and triple the number of Chinese filings from the same period a year ago. However, many of these Chinese filings are fraudulent and this avalanche of filings subsidized by the Chinese government is clogging the pipeline and delaying approvals for Americans.

Perhaps the technology stakes are highest in Artificial Intelligence (AI) and semiconductors. China may have the data and the algorithms to compete but it lags in computing power. American companies dominate the market for the software needed to design computer chips; South Korea and Taiwan host the leading chip-fabrication facilities. Three countries – Japan, the Netherlands, and the United States – lead in chip-manufacturing equipment, accounting for more than 90% of global market share.

While the U.S. Congress and the media blame American technology, information technology and data for being too big and too aggressive both at home and abroad, they are missing a much more important story. This is that Chinese companies, both state-owned and ostensibly private, are fully integrated into Beijing’s plan to become an information and data superpower, thereby controlling networks and nations alike.

Why U.S. Tech Stocks Could Benefit

The strategic value and power inherent in controlling information flows is nothing new in history. Niall Ferguson, in his book, The Square and the Tower, brilliantly lays out how the computer in our age of networks is playing the same role as the printing press of an earlier networked age. That is providing a platform for exponential growth of information and a revolutionary change of power and influence.

In a way, networks of data, information, intelligence, call it what you like, represent an invisible mesh that ties companies and countries together around the world. The same goes for financial technology through which trillions of dollars of capital, foreign exchange, and investments flow across the globe each day.

In our age of technology and finance, data is money, influence and power all rolled into one, which is why it is at the apex of the strategy of the Chinese Communist Party (CCP). So instead of curbing the power of America’s big tech, big finance and big data, let’s both regulate and unleash it to compete with China’s giants.

If we do, U.S. tech stocks could be an even more profitable place to invest in the next decade than it was in the last decade.

Do you have any investments based on the U.S.-China rivalry? Tell us about them in the comments below.


Carl Delfeld is a member of the Cabot investment team, and chief analyst of Cabot Explorer.