Hesitant about China? Our new strategy clears the path forward

What happened

Investment is about trust. Following Ant Group’s failed IPO, the crackdown on Chinese Big Tech, and the revival of Mao Zedong’s “common prosperity” slogan in 2021, almost nobody wanted to touch Chinese assets anymore.

Fast forward to today: U.S. tariffs spate has brought China back into the spotlight. Tariffs on Chinese goods are among the highest imposed by the U.S., having reached up to an eye-watering 145% - at least for the time being. They reignite geopolitical tensions and force investors to rethink their global exposure.

In this context, vastly underowned China is staging a comeback onto investors' radar.

Our conviction is clear. We have long been exposed to China through many of our strategies. Additionally, we now offer a targeted solution – AtonRâ China Technology, a strategy built to deliver 100% exposure to China’s most dynamic sectors, while leveraging both our know-how in understanding companies’ activities and in-house developed innovative quantitative methods.

In this article, we will remind investors why looking at China makes sense, and then we will introduce our strategy in more detail.

Impact on our Investment Case

Stronger position than in 2018

Despite the dramatic headlines, China’s macroeconomic and strategic posture today is far more resilient than during the last trade war in early 2018. The country has successfully diversified the list of its trading partners, with the United States' share of total Chinese exports falling from 19.0% in 2017 to 14.6% in 2024. Exports to America now account for “just” 3% of Chinese GDP (excluding potential multiplier effects).

While rising tariffs remain a concern and will inevitably affect millions of jobs in China, they are no longer the existential threat they once were. Beyond the short-term damage, China is likely to turn external pressure into a catalyst for structural reforms and domestic empowerment.

Short-term cure and long-term planning

The fiscal stimulus announced in recent months is a game-changer. The issuance of special debt in 2025 (RMB 1.3tn by Beijing and RMB 4.4tn by local governments) will help support the economy at a scale never seen before. Meanwhile, the real estate bubble, which has long weighed on consumer confidence, has largely deflated. Interest rates on selected mortgages have been lowered, and a RMB 300bn consumer subsidy program is set to further boost spending this year.

Over the longer term, China’s dual-circulation strategy (focusing on internal consumption and external engagement) aims to ensure that >1bn people become wealthier and more empowered as consumers. Moreover, large companies have initiated reforms to reduce excessive work hours, leaving more time to people to spend their savings.

Achieving this requires technological autonomy — a goal backed by both policy and structural fundamentals. With R&D intensity reaching ~2.7% of GDP in 2024, and educating around 1.4-1.5 million engineering graduates annually over the past decade (i.e, one-third of the world's engineering graduates), China is building the workforce and knowledge base needed to transform strategy into reality. DeepSeek is much more than just a “lucky strike”.

The national team’s return

Investor sentiment has also been buoyed by the return of the “national team” – a consortium of state-backed institutions tasked with market stabilization. In recent months, Central Huijin (a sovereign fund) and other entities have stepped in to purchase broad-based local ETFs, injecting over RMB 770bn into domestic equities, according to UBS. While this figure is still below the RMB 1.24tn deployed during the 2015 intervention, it reflects a clear commitment to backstop market declines and restore confidence.

These interventions act as more than just technical support for indices; they serve as a psychological backstop, showing that the state is both watching and willing to act. There is also a lot of dry powder remaining, as the national team has been focusing on the larger A-shares for the moment, while it had also gained exposure to smaller companies in the previous intervention cycle in 2015.

Our solution to accessing China

The AtonRâ China Technology strategy offers investors a robust and differentiated way to gain full exposure to China and the innovation cycle.

Investment process: Leveraging our expertise

One of our key strengths lies in a deep understanding of company business models. Over time, we have developed proprietary classification frameworks used to analyze investment universes with a high degree of granularity.

We leveraged this framework to establish an exhaustive list of companies shaping the “technology” ecosystem in China. The selection was broad yet focused, ensuring high purity in the technology theme by filtering out businesses only marginally linked to the sector.

From the resulting initial universe of over 1’000 stocks, the challenge became constructing an investable solution that captures the full spectrum of Chinese tech without relying on individual stock picking. However, owning more than 1’000 stocks is not cost-effective. This limitation highlighted the need for a more innovative approach.

After designing a market-cap-weighted index (unconstrained, i.e. including all the selected stocks) we then applied new in-house machine-learning based tools that were developed to replicate large indices using a significantly smaller number of constituents.

The result is a strategy that features a 35-stock portfolio (or 3.4% of the original universe) carefully selected (e.g., considering their liquidity) to replicate the broader index’s exposure and minimize the tracking error with the initial index. The number of constituents was determined through internal simulations that optimize the trade-off between the number of stocks and the tracking error.

Chart: Evolution of the AtonRâ China Technology Index and its replicating portfolio of 35 stocks since March 2010, in USD. The replicating portfolio was launched on 4 February 2025; before that, the replicating portfolio was backtested with quarterly rebalancing and 20bps transaction costs. Past performance does not predict future results. Source: AtonRâ Partners, LSEG.

A unique resulting index

Relying on an index of over 1’000 stocks is different from what investors can currently find in the market. All passive ETFs targeting China Technology and easily accessible for European and American investors focus on large-cap companies. They are usually composed of only 100-150 stocks and invest on average in firms with a median market cap of $26.5bn, much higher than our index ($15.6bn). This may have been appropriate in certain market phases, but not in the current environment, where the National Team should pour money into smaller companies – as it did in the previous support cycle.

Moreover, we have leveraged our classification framework. Innovation exists in sectors other than “information technology” and “communication services.” For instance, our index has a small exposure (4%) to the most innovative MedTech companies in the healthcare industry, which is not part of our peers’ universes. Capturing this exposure allowed us to outperform our peers in the recent volatile market.

Crucially, our product contains no U.S.-listed ADRs, eliminating the risk of delisting and bypassing the legal uncertainties tied to U.S. regulators. It is a Swiss-issued vehicle, meaning it is structurally immune to extraterritorial enforcement that may apply to U.S. investors, including U.S.-domiciled ETFs. The strategy also benefits from a flexible fee structure, allowing institutional investors to scale in without friction.

Our Takeaway

Correct asset allocation plays a significant role in generating performance. Avoiding opportunities can become a risk in itself. In a world where strategic competition increasingly trumps economic logic, China remains too big — and too innovative — to ignore.

China is not just reacting to external constraints; it is reshaping its economy and asserting its leadership across critical industries. A structural re-rating is in the making.

In a market where many products are constrained by regulation, market cap, or legacy benchmarks, AtonRâ China Technology stands out as a purpose-built solution for those who believe in the long-term trajectory of Chinese innovation.

Catalysts

• Multiple expansion. Fiscal and monetary stimuli will eventually lift corporate earnings. The AtonRâ China Technology index currently trades at a forward P/E of 17.6x — well below the Nasdaq 100’s 23.9x, despite having a higher EPS growth rate (18% vs 13%). This valuation gap leaves significant room for a re-rating as sentiment recovers.

• 90 days of pause, 90 days of uncertainty. The best ally of China-focused investors may be the U.S. government’s unpredictability. As long as tariff rules and geopolitical signals remain volatile, investors have a strong incentive to diversify their portfolios geographically to hedge against policy-driven shocks. 

• Extension of local ETFs purchases to smaller companies. The national team currently holds ~3% of the total A-share free float market cap (vs >6% in 2015), only in large companies. They have the capacity to intervene more massively, and smaller companies would be a logical next target.

Risks

• Massive devaluation of the CNY. To counteract tariffs and support exporters, China could opt for a large devaluation – in the range of 20–30%. While equity prices may adjust upward, they are unlikely to fully offset the loss in dollar terms. Such a move would also shake investor confidence.

• Slowing economic growth. If China fails to offset external shocks through domestic demand, its "around 5%" GDP growth target could come under pressure. A slowdown would likely weigh on corporate earnings and consumer sentiment.

• Geopolitical isolation. Several Asian countries — including Japan, Korea, and Vietnam — are already in line to negotiate trade terms with the U.S. A coordinated strategy by Washington to isolate Beijing economically could limit China’s access to critical global markets and undermine growth momentum.