By Reshma Kapadia

Chinese stocks are being overlooked as investors flock to South Korea and Taiwan for an AI fix. China's market is down 11% this year, a far cry from the emerging market superstars: South Korea is up 122%, and Taiwan is ahead 73%, both surging on the AI chip boom.

Yet there's a compelling case for China, and it's not about owning internet giants Alibaba Group Holding and Tencent Holdings -- companies that dominate the MSCI China Index. Many China experts sense opportunity in the country's lesser known companies that trade on mainland exchanges, along with some larger companies. These stocks benefit from the country's push for self-reliance. AI is also in the mix through hardware and other "picks and shovels" stocks.

Weakness in the MSCI China Index, combined with the surge in South Korea and Taiwan, have taken a toll on China's spot in emerging market indexes. In 2020, China occupied the highest country allocation, at 40% of the MSCI Emerging Markets index. Today, it's 20% and down to No. 3, pushed back by Korea and Taiwan as the top two countries.

Apathy toward China is understandable. Consumers remain averse to spending. Retail sales turned negative in May for the first time since December, 2022. And bank loan growth fell to 5.5% in May, year-over-year, its lowest point since 2001.

The U.S. and China are rolling out more trade restrictions on each other. And China's growth rests largely on its ability to sell more products abroad while countries begin to retaliate with tariffs and other measures to protect their own producers.

But China is attractive in other respects. Beijing's bid for self-reliance remains a domestic growth driver. The country is becoming a leader in emerging technologies as its research and development outpaces the U.S. It's also becoming an advanced manufacturing powerhouse for everything from large-scale industrial batteries to robotics -- leading to its $2 trillion global trade surplus last year, despite U.S. tariffs.

"China is catching up -- and fast -- in areas like large language models and GPU designs," says Vivian Lin Thurston, manager of the William Blair Emerging Markets Growth fund, referring to AI computing models and a type of chip called a graphics processing unit.

Thurston, recently back from a visit to China and meetings with companies, was energized by what she saw. "It's the only country in the world that has the entire AI ecosystem from beginning to end," she says.

Beijing is also moving to accelerate spending in the second-half of the year on its "Six Networks," according to Goldman Sachs. Those areas include water infrastructure, power grids, data centers, communications networks, pipelines, and logistics. The data center investment alone may be worth two trillion renminbi ($295 billion), which Goldman analysts estimate accounts for only 0.8% of China's fixed asset investment through 2030.

At about 12 times forward earnings, the MSCI China Index trades for about half its valuation from 2020. But that's not necessarily the best value -- it's in companies trading on local exchanges and more attuned to the country's growth drivers, along with some multinational technology companies. "There's value. It's probably a good time to think about it," says Alison Shimada, head of Total Emerging Markets Equity at Allspring Global Investments.

Investors need to be selective -- and agile. Domestic competition is fierce, hurting global companies operating in China but also making profitability harder for local players. Regulatory measures remain a risk; Beijing has moved to restrict mainland Chinese investors' paths to invest abroad, including in SpaceX and other U.S. IPOs. In June, Beijing also increased scrutiny of its private-fund industry to rein in hype around its red-hot IPO slate in Hong Kong.

But analysts see these moves as an effort to keep capital at home, rather than another 2020-style crackdown on the tech industry. Plus, China has been encouraging investment in its stock market rather than real estate, which is still reeling from speculative excesses and Beijing's crackdown.

One more word of caution: geopolitics. The U.S. Defense Department recently blacklisted dozens of Chinese companies, including Alibaba, Baidu and BYD, barring them from doing business with the U.S. military. The move was largely symbolic, but Beijing retaliated with actual trade restrictions on some U.S. companies, including rare earth producers MP Materials and USA Rare Earth.

Beyond the Internet Giants

Alibaba, Baidu, and Tencent benefit from using AI across their mass of users, but their core businesses face pressure from weak consumer spending and intense price wars.

Fund managers are more excited about other areas of tech, including products for the AI buildout and broader electrification trend. Examples include optical networking company Zhongji Innolight, battery giant Contemporary Amperex Technology, known as CATL, and electric vehicle maker BYD -- the latter two also playing a role in China's push for energy security.

Energy security is another growth area. China's success in diversifying into renewables, nuclear and coal, and building its strategic petroleum reserve helped it weather the Iran war better than South Korea and other countries more dependent on Middle East oil. The push for energy security should drive demand for CATL and BYD, says Lazard Emerging Markets Equity fund manager Rohit Chopra who owns both stocks.

BYD stock has been struggling. It's down 36% since May 2025 as its domestic business felt the sting of price wars. But BYD's lower-cost, high-range models have made it the best-selling global EV brand. Roughly half of sales are now overseas, according to analysts. And BYD is starting to manufacture outside China, including a factory under way in Hungary to sell cars tariff-free in Europe.

Chopra says investors may not be giving BYD enough credit for its industrial-scale battery systems, which are generating strong demand with the AI buildout. That segment could eventually be a third of the overall business, he adds. Analysts estimate it's now around 5%. At 13 times estimated 2027 profits, the stock is a bargain among auto makers.

While U.S. investors have access to stocks listed in Hong Kong through many brokerages, owning those listed on mainland China are more difficult.

Exchange-traded funds and mutual funds can provide exposure.

The Xtrackers Harvest CSI 300 China A-Shares ETF holds a quarter of its assets in technology companies and 20% in industrials, including CATL and Zhongji Innolight. Rayliant-ChinaAMC Transformative China Tech ETF holds 16% of assets in Alibaba and Tencent, but other top holdings tap into the AI infrastructure and industrialization themes that fund managers favor.

Recent active ETF launches have made some veteran managers cheaper to access. Matthews China Innovators Active is run by Asia investor Tiffany Hsiao, who returned to Matthews last year after a period of investing in private companies in Asia for Artisan Partners.

Baillie Gifford also just launched the Baillie Gifford Emerging Markets ETF, which has almost a quarter allocated to China across sectors.

Ben Durrant, a manager of the fund, favors companies like chip designer Montage Technology, which sells to Samsung Electronics and SK Hynix. Montage is less vulnerable to intense competition among domestically-oriented chip companies, he says, and investors don't fully appreciate its global positioning. He sees Montage growing into a company as large as Broadcom, which has a $1.9 trillion market value, over the next decade.

Durrant also owns Midea, a company known for its home appliances. But a quarter of sales now come from robotics and factory automation, data-center cooling, commercial heat pumps, and other in-demand industrials. At 12 times earnings, Durrant says investors are missing that business's value. He sees the stock as a cheap rarity, delivering free cash flow compounding annually at 10% with a 4% dividend yield.

Even those ambivalent about China's economy see positive signs on the ground for investors.

Nicholas Borst, director of China research at Seafarer Funds, said companies he met with on a recent trip were the most relaxed he has ever seen about government policy. "Market regulators are doing some things on competition and there are policies where national security is an imperative, like AI and financial stability. But in general the feel was for a loosening and more relaxed policy environment," says Borst.

That may be a greenlight for investors to take a closer look at well-positioned companies, even if China's economy merely muddles along.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 23, 2026 01:00 ET (05:00 GMT)

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