China: a tale of two stories

As with any investment, your capital is at risk.

Investing in China has been challenging in recent years. If you open any major Western media, you would likely encounter a repetitive story about China: a property sector meltdown has undermined consumer confidence, and a looming trade war threatens to further drag the economy down. China’s stock market has underperformed compared to the rest of the world for most of the recent years, and perhaps, rightly so.

However, there is another story unfolding simultaneously – China is experiencing an impressive industrial boom. It now accounts for nearly a third of global manufacturing output and leads in many modern industries such as green transition, industrial automation, and increasingly, AI.

Over the past five years, Western media audiences have heard much about the first story but very little about the second. Hence, it may have come as a surprise that China was the best-performing major stock market globally in 2024. The Baillie Gifford China Growth Trust’s net asset value rose by 38 per cent in the 12 months to end March 2025.

What has changed?

Domestic policy: a pivot towards growth

While the market predominantly focuses on the US-China trade war, it is important not to lose sight of what is more important from a Chinese business perspective: Xi Jinping’s decisions on his domestic economic policies.

Since September 2024, we have witnessed a decisive shift. The government unveiled a comprehensive economic package to stabilise key sectors and reignite growth, after years of cautious policymaking. Increasing uncertainties around Trump’s trade policy will likely further reinforce Beijing’s domestic-focused stance. More than 80 per cent of the Trust’s holdings’ revenue is from domestic customers.

Beyond financial stimulus, policymakers have also taken meaningful steps to restore confidence in the private sector, particularly in the internet and technology industries which have undergone significant regulatory scrutiny since 2021.

The emergence of DeepSeek also marks another turning point. More affordable AI is reshaping the internet industry’s landscape with potential efficiency gains, new revenue streams, deeper user engagement and improving margins. Companies held in the Trust such as Tencent, Alibaba, PDD, Meituan, and ByteDance are well-positioned to benefit. This is happening at a time when their valuations remain very attractive. In stark contrast to US big tech companies, leading Chinese platform companies have doubled their aggregate profit since 2021, but their total market cap has halved.

We believe the conditions are aligned for China’s vibrant platform economy.

The economy: the ‘change-at-scale’ matters

While policy measures have laid the groundwork, the pace of consumer sentiment improvement remains uncertain. A meaningful rebalancing of such a large economy from an infrastructure and debt-driven model to one that is fuelled by innovation and domestic consumption will take time.

However, what matters more for long-term stock pickers is the transition at scale, rather than the aggregate growth itself.

Take domestic consumption, for example. While overall sentiment remains soft post-pandemic, the consumer landscape exhibits an interesting dichotomy. Luxury ‘baijiu’ brands like Kweichow Moutai remain in high demand among wealthy consumers, while value-driven platforms such as PDD capture the attention of price-sensitive shoppers.

Experience-based spending is also making a comeback. Young consumers are embracing new trends in coffee drinking: Luckin has opened more than 20,000 coffee shops across the country, offering everything from standard Americanos to the more exotic ‘coconut latte’; families are returning to Haidilao, a hot-pot brand and a new holding for the Trust. Its restaurant chain served 450 million visits in 2024!

As the stimulus efforts begin to take hold, China’s consumption-led recovery isn’t just a possibility – it’s a transformation in motion. Economic transitions of this magnitude never proceed in a straight line, but they can create opportunities for long-term growth investors.

China’s stock market accounts for 3 per cent of the MSCI World Index. Yet, when filtering for companies expected to grow revenues by more than 20 per cent per annum over the next three years, over 35 per cent are Chinese. No other country is demonstrating such a radical shift at this sort of scale.

Innovation: the overlooked brain power behemoth

For decades, China was known as a copycat nation. This perspective is increasingly outdated. Chinese companies are driving innovative breakthroughs in many modern industries, which investors shouldn’t overlook.

China’s innovative products, which might have previously only been ‘good enough for China’, are increasingly winning over global consumers. Social commerce, a segment in which consumers browse and purchase directly through social media and live-streaming platforms, took off in China a decade ago and is now rapidly gaining popularity in other markets. BYD has zero penetration of the electric vehicle market in the US, but it commands an increasing market share in Southeast Asia, Latin America, and mature markets such as Australia and Norway.

The world factory is pivoting from ‘made in China’ to ‘invented in China’.

China’s shift toward high-end manufacturing and innovation is not just about catching up. It’s about leading. In no small part, thanks to China’s multi-decade investments in new energy, transportation and 5G infrastructure, its hyper-adaptive and demanding domestic customer base, and its large pool of talents who can refine, iterate, scale and operationalise production innovation faster than anyone else. 

China graduates 40% of the world’s STEM (science, technology, engineering and mathematics) students every year. Apple’s CEO Tim Cook once said, “if we host a tooling engineer conference in the US, we might not be able to fill a room; in China, they could fill several football fields. We came to China not for the low-cost labour, but for the skills”.

Geopolitics: is the elephant still in the room?

While tariffs and geopolitics in general remain a risk for the asset class, it is worth noting that the US and China are relying less on each other than before: both China’s export to the US as a % of its total exports and US import from China as a percentage of its total import have fallen since the first trade war. Many Chinese exporters have taken measures to diversify their export base and build manufacturing hubs outside China. While the impact of supply chain shifts will only unfold gradually, we think China is better placed than before to deal with a collapse in US trade.

We would also note that the vast majority of the Trust’s holdings generate most of their revenue domestically in China and in international markets outside of the US. The domestic economy and policy trajectory likely matter more here, and the Trust has been investing in the local substitution theme for quite some time – a trend accelerated by geopolitics.  

AMEC and Naura, for example, are stepping up to fill the gaps in semiconductor equipment manufacturing left by US export controls; Horizon Robotics, another new holding in the Trust, is emerging as “China's answer to NVIDIA” in AI-driven chipmaking.

The path forward

While US-China decoupling will not help the global economy, a resultant weak dollar would encourage broader global diversification – could this call time on the era of ‘US exceptionalism’? Global investors’ sentiment toward China is transforming from extreme pessimism to a willingness to look beyond large US tech stocks. Foreign flows to Chinese equities turned net positive in Q4 2024 for the first time in two years, thanks to the clarity in domestic policy and the attractive valuation.

We also don’t think a global growth slowdown necessarily means a bad outlook for growth investing in China. At the company level, the strong may well become stronger in a constrained environment and identifying entrenched competitive advantages therefore matters more than ever: this plays well into the Trust’s investment style.

We won’t deny that China has been, and remains, a challenging investment environment. To capitalise on the opportunities, investors should hold a long-term investment horizon that can accept periods of volatility.

More than 30 years of investment experience in China has taught us that when change happens in China, it happens with remarkable speed at an unparalleled scale. It’s precisely during periods of change and uncertainty that the most compelling opportunities often emerge.  Equally important, this shift comes at a time when many high-quality Chinese growth companies continue to trade at valuations that do not reflect their long-term potential: this is a true source of optimism. 

Past performance

Baillie Gifford China Growth Trust plc - Annual discrete performance to 31 March

Source: Morningstar, MSCI. Total return in sterling. *Changed from MSCI AC Asia ex Pacific Index to MSCI China All Shares Index on 16/09/20. Data chain-linked from this date to form a single comparative index.

Past performance is not a guide for future returns.

Important information

The Baillie Gifford China Growth Trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.

Unlisted investments such as private companies, in which the Trust has a significant investment, can increase risk. These assets may be more difficult to sell, so changes in their prices may be greater.

The Trust invests in China, where potential issues with market volatility, political and economic instability including the risk of market shutdown, trading, liquidity, settlement, corporate governance, regulation, legislation and taxation could arise, resulting in a negative impact on the value of your investment. Investments in China are often through contractual structures that are complex and could be open to challenge. The Trust’s exposure to a single market and currency may increase risk

The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.

Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.

Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co. Both companies are authorised and regulated by the Financial Conduct Authority and are based at: Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.

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Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.