Deutsche Bank: China's stock "valuation discount" will disappear in 2025

After Deepseek exploded, it may be the entire Chinese assets that need to be revalued.

In its latest report on February 5, Deutsche Bank sang bullishly, saying that 2025 is the year when China surpasses other countries, and it is expected that the "valuation discount" of Chinese stocks will disappear, and the bull market of A-shares/Hong Kong stocks will continue and exceed previous highs. Deutsche Bank said:

2025 is seen as the year when the investment community realizes that China is leading in global competition. It is increasingly difficult not to admit that Chinese companies provide cost-effective and high-quality products in multiple manufacturing and service sectors.

We expect the "valuation discount" of Chinese stocks to disappear, and profitability may exceed expectations due to policies supporting consumption and financial liberalization. The bull market of Hong Kong stocks/A-shares began in 2024 and is expected to exceed previous highs in the medium term.

Specifically, Deutsche Bank said that China's manufacturing and service industries occupy global leadership, and DeepSeek is more like China's "Sputnik" moment

China also occupies a leading position in clothing, textiles, toys, basic electronics, steel, shipbuilding and other fields, as well as in complex industries such as telecommunications equipment, nuclear energy, defense and high-speed rail. In 2025, China launched the world's first sixth-generation fighter and its low-cost artificial intelligence system DeepSeek in a week.

Mark Anderson called the launch of DeepSeek "the Sputnik moment of artificial intelligence", but it is more like China's Sputnik moment, and Chinese intellectual property has been recognized. The list of areas where China excels in high value-added fields and dominates the supply chain is expanding at an unprecedented rate.

Deutsche Bank believes that China is now where Japan was in the early 1980s

People are beginning to realize that China is now not where Japan was in 1989, but where Japan was in the early 1980s, when Japan was rapidly climbing up the value chain, providing higher quality products at lower prices, and constantly innovating.

In addition, Deutsche Bank optimistically pointed out that Sino-US trade issues may bring positive surprises, and trade and markets are not so closely related:

As Chinese companies continue to consolidate their dominance globally, the valuation discount seems to eventually turn into a premium. We believe that investors will have to turn to China quickly in the medium term, and it will be difficult to acquire Chinese stocks without pushing up share prices.

China's manufacturing advantages are becoming increasingly prominent

In recent years, China's manufacturing advantages have become increasingly prominent worldwide.

Deutsche Bank said:

From its initial rise in the fields of clothing, textiles and toys to its current dominance in basic electronics, steel, shipbuilding and other fields, the development trajectory of China's manufacturing industry is remarkable. In particular, in the fields of white goods and solar energy, the performance of Chinese companies has emerged as a new force.

It is worth noting that China's rise in complex industries such as telecommunications equipment, nuclear power, defense and high-speed railways has demonstrated its strong technological strength. At the end of 2024, China's rapid rise in the field of automobile exports attracted global attention, and its high-performance, attractive and competitively priced electric vehicles (EVs) successfully entered the international market. In 2025, China launched the world's first sixth-generation fighter and low-cost artificial intelligence system DeepSeek in just one week, which was regarded as an important sign of the recognition of China's intellectual property rights.

The strength of China's manufacturing industry can be confirmed from the following aspects:

1. Export scale: China's commodity exports are twice that of the United States, contributing 30% of the global manufacturing value added.

2. Patent applications: In 2023, China will account for nearly half of global patent applications. In the field of electric vehicles, China has about 70% of patents, and has similar advantages in 5G and 6G telecommunications equipment.

3. Talent pool: China has more STEM (science, technology, engineering and mathematics) graduates than any other country in the world except India.

4. Industrial clusters: China has created local professional clusters similar to Silicon Valley for key industries and works closely with universities on research.

China is more like Japan in the early 1980s

Deutsche Bank believes that China is more like Japan in the early 1980s:

Japan's growth was achieved by taking advantage of abundant cheap labor, intensive use of capital and increased productivity. Domestic investment is over 30% of GDP, helped by financial repression that kept interest rates low. Japan acquires new technology through joint ventures. Savings were 40% of GDP in the early 1970s, then fell to nearly 30% in the early 1980s. Japan began setting up factories overseas in the 1970s to avoid trade frictions, something China has only recently begun to do.

Deutsche Bank also said:

Liberalizing the financial system is helpful in promoting consumption, by normalizing interest rates, thereby ending the transfer of funds from depositors to enterprises. This will reduce over-investment and over-competition because capital is rationed, which will help improve the return rate of state-owned enterprises. We expect that as state-owned enterprises improve their return rates, they will be required to ease excessive competition to increase stock value. We expect this to become a key topic in 2025, and this factor will become a key factor driving the bull market.

In addition, China's economy and exports are still growing rapidly. In 2024, China's exports will increase by 7%, exports to Brazil, the UAE and Saudi Arabia will increase by 23%, 19% and 18% respectively, and to ASEAN countries in the "Belt and Road" will increase by 13%. China's exports to ASEAN and BRICS countries are now equivalent to the total exports to the United States and the European Union, and its export market share to these destinations has increased by two percentage points each year over the past five years.

The driving force of China's economic growth comes from several aspects:

1. Manufacturing advantages: In almost all industries, China has world-leading companies and continues to seize market share.

2. The Belt and Road Initiative: The initiative has opened up regions such as Central Asia, West Asia, the Middle East and North Africa, expanding China's potential market.

3. Automation leadership: About 70% of industrial robots are installed in China, driving productivity advantages.

4. Domestic demand potential: Household deposit growth has slowed to twice the nominal GDP growth rate, but savings have increased by $10 trillion since 2020, and these savings are expected to flow into consumption and stock markets in the medium term.

China-US trade issues may bring positive surprises, and trade and markets are not so closely related

According to CCTV News, US President Trump signed an executive order on February 1 to impose a 10% tariff on goods imported from China. But Deutsche Bank believes that the actual situation may be more favorable than expected. The Trump administration seems to value tactical victories more than adhering to ideological positions that are difficult to support.

The launch of DeepSeek has shaken the world's belief that China can be contained. A better approach may be to stimulate business by reducing regulations, providing cheap energy and relatively low barriers to imported intermediate products. It is expected that a more trade-oriented stance will eventually become part of the developing "America First" agenda before the mid-term elections.

Deutsche Bank analysis believes that a quick US-China trade agreement may involve limited tariffs, the withdrawal of some current restrictions, and some large contracts between US and Chinese companies. If this happens, Chinese stocks are expected to rise.

Declining exports may actually drive stock market gains for a period of time. China's dominance in various industries has been achieved through overinvestment in many areas. If supply can be restricted, it may be beneficial to stocks and free up some capital for domestic consumption.

Overall, Deutsche Bank believes that as Chinese companies continue to consolidate their dominance around the world, investors may need to quickly adjust their strategies and increase their allocation to the Chinese market. It is expected that Hong Kong/China stocks will continue to lead global markets in the medium term, continuing their strong performance in 2024.

We believe that global investors tend to severely underweight China, just as they avoided fossil fuels a few years ago until the market punished those who made non-market decisions. We see similar positions in China today. Investors who like leading companies and have moats cannot ignore that it is Chinese companies that have wide and deep moats, not Western companies.

As Chinese companies continue to consolidate their dominance around the world, the valuation discount of the Chinese story seems to eventually turn into a premium. We believe that investors will have to turn to China quickly in the medium term, and it will be difficult to get Chinese stocks without pushing up the stock price. We have been bullish before, but have been troubled by finding what factors will prompt the world to wake up and buy, and we believe that China's "Sputnik moment" (or dominance in the electric vehicle field) is this factor.