By Zhou Shaoji

Since 2017, when Donald Trump first took office as US president, the US has imposed tariffs and a series of sanctions on China. These measures have pushed Chinese industries to adopt "domestic substitution" as a key strategy. With Trump returning to the presidency in January 2025, a new wave of US-China trade frictions and technology sanctions has emerged. However, China's recent breakthroughs in various technology fields, including artificial intelligence (AI), have bolstered the domestic substitution narrative. The debut of the innovative DeepSeek AI has drawn significant investment interest toward Chinese semiconductor and software stocks.

Market experts note that the number of areas where the US can block China's progress is shrinking. In AI, for example, China has achieved notable breakthroughs, while its aerospace technology is already considered world-leading. However, sectors such as chips, lithography machines, system software, and pharmaceuticals still require rapid advancements. These areas have become hotspots for investors seeking opportunities.

Urgency in AI and chip substitution

A report by Everbright Securities highlights that intensifying external sanctions will benefit SMIC, China's leading chip manufacturer. Tianfeng Securities similarly predicts that geopolitical pressure on China's semiconductor industry will accelerate the development of its domestic supply chain. The firm believes that domestic substitution in cutting-edge fields such as AI and advanced chip manufacturing is particularly urgent, creating substantial opportunities for China's technology sector. It recommends investors focus on these high-potential areas.

SMIC has already been a market focal point in 2025, with its share price surging over 30% since the beginning of the year. According to reports, the Semiconductor Equipment and Materials International (SEMI) organization revealed that SMIC is poised to become the world's third-largest chip foundry by 2024. Yip, Sheung-chi, Chief Strategist at First Shanghai, noted that the market has developed a consensus on the importance of domestic substitution, leading to higher valuations for Chinese tech stocks. He advised investors to seize opportunities during market pullbacks.

DeepSeek fuels tech stock rally

Huatai Securities pointed out that the valuation gap between US and Chinese tech stocks has widened significantly over the past two years, with AI development being a critical factor. The recent launch of DeepSeek has prompted investors to reassess the technological potential of Chinese tech firms, potentially driving a revaluation of Chinese and US tech stocks. Since AI relies on both hardware and software, the firm advises investors to increase their exposure to internet and hardware stocks to capitalize on this reassessment.

In addition to hardware like semiconductors, domestic software substitution is equally critical. Huawei's HarmonyOS and EulerOS have gained momentum, particularly with the launch and implementation of the "Pure HarmonyOS." Over the past few months, Chinese software stocks have attracted substantial capital inflows. Companies such as Kingsoft (3888), Kingsoft Cloud (3896), and Meitu (1357) have all hit 1-year highs amid growing investor interest.

(Source: Wen Wei Po)

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