China’s Two Sessions unveil opportunities in technology-centric sectors

• China has set its GDP target at around 5% for 2025, alongside increased bond issuance of CNY 11.86 trillion to support fiscal spending.

• Boosting consumption is China’s top priority in 2025, with more budget allocated to the consumer goods trade-in program. However, we believe further actions are needed to improve employment prospects.

• The widespread application of AI models and China’s push for RISC-V technology showcase its ambition to strengthen its technological capabilities despite US restrictions. Additionally, China is offering more support for private sectors to drive innovation.

• While prepared for a potential trade war, China remains open to negotiation. Amid rising trade tensions, the economy is focusing on supporting cross-border e-commerce and emphasising self-sufficiency in food.

• Policies outlined at Two Sessions provide a tailwind for China’s tech-centric sectors, and we recommend investors consider the iShares Hang Seng Tech ETF (HKEX: 3067 / 9067) to capitalise on China’s opportunities.

China made headlines once again by setting its GDP growth target at “around 5%” during the National People’s Congress, which commenced on 5 March 2025. While this aligns broadly with our expectations, there is no doubt that it remains an ambitious goal, especially amid rising trade tensions with the US.

The question arises again this year: Can China achieve this target in 2025? Our stance remains the same as in 2024 - challenging, but not impossible given China’s resolve to meet the goal.

The policies outlined during the Two Sessions back up China’s commitment to deliver, with increased government spending playing a crucial role in driving economic growth. This year, China’s budget deficit will rise to 4% of GDP - the highest level since 1994. In total, new government debt is projected to reach CNY 11.86 trillion, an increase of CNY 2.9 trillion from last year (Table 1).

Table 1: A breakdown of the 2025 government debt allocation and purposes

	Debt amount (In CNY Trillion)	Purposes
Budget Deficit	Increased to 4%, equivalent to CNY 5.66 trillion	General public spending
Ultra-long special sovereign bond	1.30	CNY 300 billion for the Consumer Trade-in Program CNY 200 billion for equipment upgrades CNY 800 billion for strategic infrastructure development
Special local government bond	4.40	CNY 800 billion to swap hidden local government debt Remaining funds allocated to local investments, land acquisition, purchase of existing commercial housing, and settling outstanding payments owed by local governments to enterprises
Special sovereign debt	0.50	To recapitalise state-owned banks

Boosting Consumption is the top priority in 2025

Boosting consumption has been placed as the top priority this year, highlighting China’s focus on reviving sluggish household demand and steering the country out of its deflationary spiral. To accelerate this effort, CNY 300 billion - double last year’s amount – will be allocated to expand the consumer goods trade-in program. The list of subsidised goods has also been broadened to include more home appliances and electronic products.

Since early 2023, China has been grappling with persistently low inflation (Figure 1), as the property market downturn has eroded household wealth and weak employment prospects have dampened consumer spending. The trade-in program, first introduced in 2024, provided some relief but fell short of reversing the broader deflationary trend due to its limited scale and impact.

Figure 1: China continues to face deflationary pressures

We believe this year’s expanded trade-in program will encourage spending across a broader range of goods. However, its ultimate impact will depend on China’s ability to further stabilise the property market and improve employment prospects to boost consumer confidence. Since last year’s stimulus measures were introduced, the property market has shown signs of stabilisation. In February, the value of new home sales by the 100 largest property developers rose 1.2% year-over-year - a sharp reversal from the double-digit declines recorded in the first half of 2024.

The next major challenge to tackle is youth unemployment. During the Two Sessions meeting, policymakers set a target of creating 12 million new jobs this year to support employment. As much of the focus has been on labour-intensive industries, we believe more targeted support is essential for young job seekers. Potential solutions could include expanding job opportunities in emerging technology sectors, offering greater subsidies to companies that hire young graduates, and establishing stronger startup support programs for university students. In our view, the current employment policies still lack the final piece of the puzzle—a crucial element needed to translate job creation into enhanced consumer spending capacity and confidence.

AI will be a key narrative of economic growth

With DeepSeek’s success, AI has reshaped the narrative surrounding China’s economic growth potential and technological capabilities. A key highlight of this year’s Two Sessions meeting was the emphasis on expanding the application of large-scale AI models and developing next-generation intelligent devices and smart manufacturing equipment. This includes intelligent connected new-energy vehicles, AI-powered smartphones and computers, and advanced robotics. China has now officially embarked on a new era of an AI-driven economy.

To overcome bottlenecks created by chip bans and the dominance of proprietary instruction set architectures (ISAs), China also plans to build “a system of open-source models” in the technology sector. This includes fostering emerging technologies such as RISC-V, an open-source architecture for designing a broad range of less complex chips. Currently, most of the world’s general-purpose chips use ISAs licensed from US companies like Intel (x86) and ARM Holdings (ARM), while specialised AI chips, such as those developed by AMD and Nvidia, typically rely on proprietary ISAs.

RISC-V is emerging as a viable alternative - its open-source and royalty-free nature makes it particularly attractive to Chinese chip designers seeking to reduce dependence on foreign semiconductor technology, especially amid tightening US export controls. This initiative reflects China’s strategic push to shield its technology sector from the risks of US-led decoupling.

Beyond government funding for technological innovation, China is now refocusing on private enterprises, marking a notable shift after the regulatory crackdowns that loomed over leading tech companies in the past four years. DeepSeek’s success has also reinforced the importance of venture capital and startups in driving technological breakthroughs and achieving self-reliance in chip production and AI applications.

This year, several developments have signaled a renewed commitment to the private sector - from February’s high-profile symposium chaired by President Xi with business leaders like Jack Ma, to the Two Sessions discussions on strengthening private sector support, and even legislative efforts to introduce new laws fostering private enterprise growth. These steps indicate that China is working to create a more business-friendly environment, where companies active in AI, such as Alibaba and Xiaomi, as well as domestic chip designers and manufacturers, stand to be the first beneficiaries of policy tailwinds.

Whether China’s technological advancements can overcome US trade restrictions and protectionist policies remains to be seen. However, positive signals are emerging, setting the stage for a potential rebound in China’s private sector in 2025 - a foundation for innovation, growth, and a gradual restoration of confidence in the world’s second-largest economy.

China is prepared to navigate geopolitical tensions

China remains firm in its stance on US tariffs, showing its determination to retaliate if they persist. After the US imposed an additional 10% tariff on Chinese goods, which took effect on 4  March 2025, China responded by levying additional duties on the vast majority of US agricultural exports. This includes a 15% tariff on wheat, corn, and cotton, as well as a 10% tariff on soybeans, pork, beef, fruit, vegetables, and dairy.

Given that China has accounted for approximately 30% of cotton and 50% of soybean exports from the US in recent years, this move will not only negatively impact US agricultural markets but also disrupt China's agricultural import supply chain. To bolster domestic food security, China has raised its annual grain production target to 700 million tons for 2025, up from the previous target of over 650 million tons, to strengthen its food self-sufficiency.

In addition to countering tariffs and reducing reliance on the US, China is taking steps to facilitate trade and cushion the economic impact by supporting cross-border e-commerce. Measures include improving logistics networks and expanding overseas warehouse infrastructure, both of which were highlighted in the Two Sessions meeting. These initiatives come at a critical time, as Trump’s removal of the "de minimis" exemption - which previously allowed duty-free entry for US packages under USD 800 – will negatively impact cross-border trade. Beijing’s focus on trade and e-commerce underscores its support for Alibaba’s Taobao and Tmall, as well as Shein and Temu.

Despite China’s tough stance on US tariff policies, President Xi remains open to negotiation and is looking for ways to de-escalate trade tensions. The government work report reaffirmed China’s commitment to stabilising foreign trade and investment, regardless of external challenges. The report also called for increasing foreign investment, integrating foreign businesses into China’s industrial supply chain, and providing easier access to resources, qualifications, and government procurement opportunities for foreign enterprises.

Although China simplified investment rules for foreign investors last year, the momentum of foreign direct investment (FDI) has remained sluggish. In 2024, FDI inflows to China declined by 27.1% year-over-year (Figure 2). With tariffs rising and global investors still assessing the signals from the Two Sessions, the effectiveness of China’s latest policies to stabilise FDI remains uncertain. Nevertheless, China’s proactive economic measures and policy shifts favouring the private sector signal a greater commitment to opening up. If these efforts gain traction, they could help restore investor confidence and drive a rebound in FDI later this year.

Figure 2: Global FDI inflows to China declined by 27.1% in 2024

Tech-centric companies will be the main beneficiaries of the Two Sessions policies

We believe the Two Sessions have set the right course for China to emerge as this year’s dark horse market. Increased support for the private sector is clear, with policies focused on promoting AI development and expanding cross-border e-commerce. While a confidence crisis cannot be resolved overnight, growing positive signals like these may gradually rebuild trust. Strengthened fiscal stimulus measures have been outlined; however, we believe more targeted policies are necessary to address weak employment prospects and rising youth unemployment. By improving the employment conditions, consumers will gain greater confidence in their spending.

Overall, stronger-than-expected government support for the technology sector and consumer trade-in programs provided a tailwind for both the information technology and consumer discretionary sectors. China-related indices advanced, driven by supportive policies, from 4 to 6 March 2025. The Hang Seng Tech Index led the gains with a 9.6% increase over the three days, followed by the China Enterprise Index at 6.2%, bolstered by its substantial allocation to leading internet companies. Both indices significantly outperformed the A-share market’s CSI 300, which posted a more modest 1.8% return (Figure 3).

Figure 3: H-shares have outperformed A-shares both after the meeting and year-to-date

Adding to the appeal of H-shares is their significant valuation discount compared to their A-share counterparts (Figure 4), making them more attractive to both domestic and international investors seeking greater exposure to China’s equities. As technology companies continue to benefit from supportive policies and improve their earnings, this valuation gap is expected to gradually narrow.

Figure 4: H-shares are traded at a significant discount to their A-share peers

For investors looking to capitalise on opportunities in China, we recommend considering an allocation to the iShares Hang Seng Tech ETF (HKEX: 3067 / 9067). Top holdings include leading technology companies like Xiaomi, Alibaba, and China’s largest chipmaker SMCI. With around 42% of the assets allocated to consumer discretionary and 32% to information technology, the ETF is well-positioned to benefit from the latest policies driving AI development and consumption.

Additionally, we believe maintaining exposure to the broader China market remains a viable strategy, offering a dual advantage—capturing the Hong Kong tech rally while also capitalising on opportunities in the A-share market, supported by policies aimed at stabilising domestic equities. As such, investors may also consider our recommended fund for China: Fidelity China Focus A-SGD, or passive strategies like the iShares Core MSCI China ETF (HKEX: 2801) or iShares MSCI China ETF (NASDAQ: MCHI).

Declaration:

For specific disclosure, at the time of publication of this report, the analyst who produced this report holds positions in iShares Core MSCI China ETF (HKEX: 2801).