China's AI independence creates an emerging markets growth case

Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on Emerging Markets and the sectors and countries within the asset class. 

Despite AI being the dominant force behind global equity performance in recent years, with Korea and Taiwan benefiting as key links in the AI supply chain, one emerging market country has been pushed in a different direction: China.

According to RBC GAM UK’s Christoffer Enemaerke, China has entered a new phase of strategic competition. Tightening US export restrictions have left the country with little choice but to develop its own capabilities. For emerging market investors, the question is whether that buildout creates a structural growth story or offers little value.

China's AI self-sufficiency play is a decade-long bet

"We're now at a point where China has realized they actually need to become self-sufficient and need to build out their own supply chain. They need to have companies across the value chain. Companies that make semiconductor equipment all the way through to the applications that consumers use,” Enemaerke said, pointing to sectors like electric vehicles, high-speed rail, and solar where Chinese companies have reached global competitiveness.

RBC GAM UK had run an underweight position on China for years, Enemaerke noted, concerned about company quality, corporate governance, and long-term headwinds from demographics and debt but that stance has since shifted.

"We have really seen China move up the value chain in terms of having some of the global leading companies across different industries," he said. “We think that this is going to be a very long-term thesis in emerging markets. It's going to be a decade long story of structural growth in China which is going to benefit some of the companies in China a lot.”

What might break the AI independence thesis

But the central risk to the self-sufficiency thesis is how closely it remains tied to global AI sentiment. China is building its own supply chain and generating its own demand, but whether that insulation holds during a broader AI correction is an open question.

“I guess the answer might be somewhere in the middle, that maybe China's AI self-sufficiency story shouldn't be derailed too much by what happens globally with AI," he said. “But at the same time, when we look at kind of what's happening in the market, it does seem to be moving sort of in the same direction, and it does have correlations with each other.”

Enemaerke emphasized the potential emergence of two distinct AI narratives - a global one and a Chinese one - as something worth watching closely over time.

Where China’s market is pricing in the self-sufficiency narrative

According to Enemaerke, China's gaps to global leaders vary across the supply chain. For example, on the hardware side, China lacks access to extreme ultraviolet lithography (EUV) equipment, which is critical for producing the most advanced logic and memory chips. He suggests this notably forces domestic manufacturers to rely on older technology. He believes that bottleneck puts the country at least three to four years behind global leaders like TSMC, Samsung, and SK Hynix.

"It seems very unlikely that China will get access to EUV equipment anytime soon," he said.

However, the picture improves further down the value chain, where in advanced chip packaging, assembly and testing, and NAND flash memory, Chinese firms are already competitive with global peers.

The most striking progress, though, has come on the software side. Despite the hardware constraints, China's large language models have started closing ground on frontier models, a development Enemaerke finds notable given the equipment disadvantages.

Still, what makes the thesis distinct from a standard catch-up narrative is the role the state plays here. Enemaerke argues that only two countries can realistically build a full AI supply chain: the US and China.

"We think that's quite unrealistic," he said of the prospect of Europe or other regions replicating the effort. "The state is really thinking decades ahead about some of these investments that they're making and we don't really see other countries having the ability to do what China is doing."

He suggests that long-term state commitment gives the investment case its structural character. But finding the right entry points also requires discipline. Many Chinese hardware names in the AI supply chain have already posted strong returns this year, though prices have pulled back alongside the broader sell-off in AI stocks. He emphasized how RBC GAM UK is watching those names for better entry points rather than chasing the rally.

The more interesting opportunity, in Enemaerke's view, may sit with China's large internet platforms. Notably, companies like Alibaba and Tencent haven’t benefited from the AI narrative to the same degree, despite Alibaba's exposure across the value chain and Tencent's strength in social and gaming. Moreover, both trade at cheap valuations relative to their own histories.

Alibaba, for instance, is building what it calls a full AI stack - spanning chips, cloud, e-commerce, and proprietary models - positioning itself across the entire value chain, whereas Tencent has drawn more skepticism from investors over what some view as insufficient AI spending.

"Historically, Tencent had very good management quality. So if you trust that the company is doing the right thing for the long term, perhaps we should expect them to follow the right strategy," he said, adding that if they can adapt to the shifting technology landscape and emerge as clearer AI beneficiaries, Enemaerke sees potential for those valuations to re-rate.

To that end, Enemaerke emphasized selectivity matters because each company is taking a different approach to AI. Management quality is the first thing RBC GAM UK evaluates, and Enemaerke sees it as the defining factor behind the most successful companies in emerging markets.

Can China regain its edge as an emerging market investment?

For China to fully compete on a global scale again, Enemaerke believes the country will require sustained investment in R&D and innovation. Even without access to EUV lithography, Chinese firms are working to push existing equipment and technology further. Enemaerke sees the talent base as a key advantage.

"China has very strong talent in terms of engineering. For example, if you look at the STEM graduates that are coming out of China, they have by far the most globally. So the people and the talent side is very much there in China," he said, adding the quality of senior leadership at Chinese tech companies reinforces that pipeline, with many executives having built careers at top US firms before returning to start companies at home.

For institutional investors who have trimmed China in recent years, Enemaerke believes the valuation case has strengthened even as the market has lagged the broader EM rally.

"We can definitely find good companies in China," Enemaerke said. "And the valuation of the Chinese equity market is also more attractive, I'd say, compared to other parts of the market."