As the United States and China agree to an uneasy one-year cease-fire, the takeaway for investors is that each country will double down on homegrown technology, analysts say. How to navigate the new “export control regime,” Morgan Stanley strategists recommend in a report this month: “Own high-quality localized exporters and R&D-rich tech stocks, and use scenario odds, not headlines, to assess risk.” “Strategic conflicts remain unresolved, with technology, critical supply chains and capital markets at the center of ongoing tensions,” the report said. The U.S. government has restricted China’s access to advanced technology and encouraged artificial intelligence-related investment in the United States, but China is stepping up its own spending and resource allocation for advanced technology in its next five-year plan. Quasi-computing power At the heart of the AI race is computing power: semiconductors. Morgan Stanley’s top candidate is SMIC, a major Chinese semiconductor company. Analysts rate the Hong Kong-listed stock as overweight, with a price target of HK$80 ($10.28). This is more than 16% higher than the stock’s closing price on Friday. “Given U.S. export restrictions and capacity expansion, SMIC expects further increases in orders for advanced node manufacturing,” the analysts said. “We also believe that SMIC’s advanced node capacity expansion will support AI semi-development in China.” Another growing concern is whether companies have enough energy to power AI. Analysts at Goldman Sachs predicted this month that by 2030, China will have more than three times as much spare power capacity as the world needed to power its data centers at the time. HSBC said late last week that energy independence is one of the emerging themes driving regional stocks over the coming year. “The story for Asian stocks in 2026 will be guided by a shift away from crowded AI trading,” the firm’s analysts said. The bank’s top pick was Hong Kong-listed small-cap Harbin Electric, which had more than 60% upside against HSBC’s price target of HK$22 based on Friday’s closing price. “Harbin Power accounts for about one-third to half of the domestic market share for coal, nuclear and hydropower equipment, with these sectors contributing nearly 70% of its (2024) revenue,” HSBC analysts said. “Harbin has an asset-light business model and receives up-front payments from customers.” Robot Hardware When it comes to commercializing AI, Chinese companies are competing with their U.S. peers not only in software advances but also in hardware applications, especially for humanoid robots. Goldman Sachs analysts visited nine humanoid robot supply chain companies earlier this month and found that most of them are “aggressively planning production capacity both in China and overseas (primarily Thailand and to a lesser extent Mexico)” to support the potential for mass production of 100,000 to 1 million robots per year. While this may be too optimistic compared to Goldman’s forecast of annual humanoid shipments of 1.38 million units by 2035, analysts said suppliers are moving aggressively and customers include well-known humanoid companies Tesla Optimus, Agibot and Xpeng. The only business in Hong Kong that Goldman rates as a “buy” is Sanhua, which says management is taking a more conservative approach of ramping up production based on actual customer orders. Sankasha also has secured production capacity for humanoid robot parts in Thailand. Despite excitement over long-term innovation, markets will still focus on the latest U.S.-China trade talks in the short term. The two countries have not yet reached a firm agreement on rare earth exports, but U.S. Treasury Secretary Scott Bessent has suggested a deal could be reached by Thanksgiving. All of this means that Chinese stocks are likely to continue to be volatile. “We believe this ceasefire is fragile given the continued competitive rivalry between the United States and China on multiple fronts,” Morgan Stanley analysts wrote, “which means that gradual negotiations, ceasefires, and periodic flare-ups are likely to become the new norm for the foreseeable future.” Morgan Stanley said the MSCI China Index tends to correct in the short term after a period of US-China tensions. But they found that “technology hardware and semiconductor names often recover within a month of an initial sharp decline.” —CNBC’s Michael Bloom contributed to this report.
