A tale of two Chinas

Nice note from BlackRock:

Outside China, the key question is whether companies use Chinese technology or compete against it. Cheaper Chinese industrial robots and machinery can boost productivity and ease labor shortages for their customers. For rival producers, the economics are less appealing. European machinery makers illustrate the squeeze. China has moved from a major buyer of advanced machinery to a formidable competitor at home and abroad. In 2025, it overtook Germany as the world’s largest machine-tool exporter for the first time.

iAI creates a similar divide. Cheaper Chinese models could accelerate AI adoption while commoditizing the model market. That could shift value toward the physical infrastructure needed to support greater AI use - computing power, data centers and electricity - reinforcing the scarcity investment theme from our Midyear Global Outlook. Physical AI could amplify demand for power electronics and batteries while broadening demand for components like motors and actuators – areas where China already has a manufacturing and supply-chain advantage. But technology sovereignty cuts both ways: export controls and efforts to reduce reliance on Chinese technology could limit market access. That makes geopolitics a key risk to where the opportunity ultimately lies.

Inside China, industrial policy has helped build scale and competitiveness, but growth alone does not guarantee shareholder returns. Long-standing challenges – including weak domestic consumption, a soft property market and an aging population – remain, while intense competition can squeeze margins even in industries where China has gained global market shares. The divergence is stark: profits at Chinese electronic-device makers rose 110% year over year in the first seven months of 2026, supported by global AI demand, while auto profits fell 20.4%, according to data from the National Bureau of Statistics of China. Likewise, AI hardware suppliers have expanded margins, while solar manufacturers have seen theirs collapse. Markets echo that divide: the MSCI China index has lost 11% in U.S. dollar terms this year through Sept. 21, while the MSCI China Information Technology index has gained 7%.