China: A Different Way to Play AI

Global investors are fretting over Artificial Intelligence (AI) stock valuations, monetisation, and whether the bubble will burst. China may offer a different way to play the AI theme.

The country's AI strategy has always centred on integrating data, talent and infrastructure. That’s now accelerating thanks to three external factors:

• US high-tech restrictions have forced China to optimise software and algorithms to extract maximum performance from less powerful chips, rather than competing on raw computing power
• An influx of talent to the region: academics, engineers and entrepreneurs repatriating to China, driven by China's talent-attraction schemes and stricter US visa controls
• Structural advantages in energy infrastructure. Unlike the US, China has spare power capacity after years of coordinated infrastructure investment

AI-adjacent companies

Whether AI capex proves durable remains to be seen, but there are opportunities emerging now. The immediate beneficiaries are companies providing data-centre infrastructure. Whilst chip providers were the first beneficiaries, we're now looking further down the tech stack at server-assembly and computer-cooling systems. These businesses prosper regardless of whether AI delivers on its promise or which large language model (LLM) wins. If data centres get built, they profit.

Robotics

Robotics represents China's clearest structural advantage, which is the intersection of its manufacturing excellence and AI capability and the country is already leading the charge on robotics patent filings.

Figure 1. China has overtaken the US in patent applications

Source: Man Group calculations based on data from the European Patent Office and the United States Patent and Trademark Office, as at 31 December 2024.

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Given that we have a world already designed for humans, humanoids can expand their use cases faster than specialised robots. This matters because as AI models reach the limit of learning from predetermined data sources, they need real-world interaction, the kind of learning we get from imitation and simulation.

Like with many areas of early innovation, identifying ultimate winners is difficult. The focus is on companies enabling this technology, such as actuator manufacturers, which make components that enable robots to move. An actuator converts electrical energy into mechanical movement - it's essentially the `muscle' of a robot. In humanoids, actuators control the joints (shoulders, elbows, knees, fingers, etc.), allowing the robot to walk, grab objects, and perform physical tasks.

Biotech

Biotech tells a separate story but reflects the same talent dynamics. China is transitioning from the world's factory to an innovation leader, nowhere more apparent than in healthcare. For decades, China manufactured generic drugs. Today it is becoming a force in global biotech innovation. This reflects talent repatriation, improved manufacturing efficiency, and two other factors: regulatory harmonisation following high-profile scandals now ranks China alongside the Western world, whilst the fast-approaching patent cliff (estimated at over US$150 billion over the coming decade) creates opportunity.

Chinese biotech companies are now signing blockbuster licensing deals with major international pharmaceutical firms worth billions of dollars, a significant shift from their historical role. Global leaders are emerging across oncology, cardiology, and immunology, entirely separate from AI hype cycles.

Getting through the air pocket

Long term, we remain confident that China is in the early stages of its long-awaited rotation towards a more balanced, consumption-orientated economy. In the short term, weaker data points suggest a slowdown in confidence. The government will outline the nuts-and-bolts details of its next five-year plan in March. Until then, an air pocket persists, with weak consumption and slowing exports likely to continue driving sentiment.

However, whilst markets wait for stimulus or worry about AI returns, the structural build-out continues. For investors, that means opportunities in companies benefiting from this positioning exist today, even as headline volatility persists.

All data sourced from Bloomberg unless otherwise stated.

Author: Nick Wilcox, Managing Director, Discretionary Equities at Man Group