China's rebound has a distinct 'cool factor'

In January, TikTok suspended its U.S. services for one day, when the outgoing administration shut down the app due to its ties to China, before the decision was swiftly reversed by the incoming Trump administration.

Days later, Chinese artificial intelligence company DeepSeek shocked the world with its cost-effective, high-performance R-1 reasoning model, triggering an intense debate about who will lead the “AI race”.

And then in early May, U.S.-China tensions reached unprecedented heights, as tariffs jumped above 100%, effectively halting bilateral trade, before de-escalation.

By summer, however, China was once again exporting critical rare earth to the U.S. and Nvidia had re-started the sales of its AI chips to China, suggesting a burgeoning trade detente between the world’s two largest economies.

Amid this volatility, China’s capital markets have responded favorably. The MSCI China Index has surged around 25% year-to-date through July 25, outpacing the MSCI All-Country World index’s 12% gain and the S&P 500 index’s 9% rise.

Notably, this strong performance has been driven not just by typical business-cycle fluctuations, but also an appeal rooted in innovation, collaboration and youth culture, suggesting China’s next growth cycle could look very different from those in the past.

IMITATOR TO INNOVATOR

China's evolution from low-cost imitator to global innovator is epitomized by its electric vehicle dominance. Chinese EV leader BYD, which began as a battery maker and currently has a market cap of $150 billion, was once dismissed by Elon Musk for its unattractive products and weak technology.

However, a decade of development, supported by state-backed infrastructure including China's 10-million-strong charging network, has propelled BYD past Musk's Tesla in global sales. In 2024, one of every five EVs sold globally was from BYD, whose market share is now double that of Tesla's. Moreover, BYD’s vehicles, like many other Chinese EVs, now boast the type of sleek designs and novel amenities associated with its U.S. rival.

Beyond product innovations, some Chinese companies are also experimenting with new business models and sales strategies.

For example, livestream social shopping, which was pioneered by Alibaba, has been adopted by Amazon, Instagram, YouTube and even Walmart (in collaboration with TikTok) in the U.S. to target Gen-Z and millennial shoppers.

New players like Chinese toymaker Pop Mart are also experimenting with fresh business models. Its designer toys are sold in mystery boxes, where sealed packages conceal randomized plush "Labubu" figures, which adorn the luxury handbags of many influencers.

This strategy seeks to tap into the thrill of uncertainty, creating viral demand beyond the Chinese domestic market. And this appears to be working. Pop Mart’s sales from outside mainland China contributed to nearly 40% of its total revenue in 2024, and its profit in the first half of 2025 is expected to soar by at least 350% year-over-year.

OPEN-SOURCE ARCHITECT

Historically, tensions surrounding intellectual property have dogged China's global trade relationships. Today, however, its embrace of open-source collaboration appears to signal a profound shift.

China is now the fastest-growing and second-largest contributor of open-source code on GitHub, the world's leading platform for software collaboration. Moreover, Chinese tech giants like Huawei and Tencent rank among the top corporate sponsors of Apache and Linux foundations, major nonprofit organizations that shape foundational technologies like artificial intelligence and cloud computing.

DeepSeek's R-1 model exemplifies this strategy. Released under the permissive MIT license, it grants large-scale commercial reuse rights (unlike Google's Apache 2.0 or Meta's Llama licenses) and has fueled countless derivative models globally. Such openness has the potential to build developer loyalty, influence AI standards, and circumvent geopolitical friction.

This shift has been underpinned by a focus on developing scientific prowess. In 2024, China led the world in high-quality research publications, according to Nature, holding the top spot for the second consecutive year. Its advantage in publications extends even to semiconductor design and fabrication, a field where U.S. technological superiority is often assumed, with Chinese scholars authoring over half of the most-cited papers in this field in 2024.

STRUCTURAL HEADWINDS

However, the outlook for the country’s businesses is not all rosy. Industrial profits are still shrinking, falling 1.1% year-to-date, despite various government stimulus measures, including a recently expanded consumer subsidy scheme and a central bank-backed initiative for state-owned enterprises to buy unsold homes.

And price wars in sectors such as EVs and food delivery have gotten so brutal that the authorities have stepped in to mediate “irrational” competition.

Another structural issue is the country’s stubbornly high youth unemployment rate (16-24-year olds excluding students), which remained at 14.5% - well above the 5% rate for the labor force as a whole.

If China’s future growth is to be driven more by a “cool” factor, then the career prospects of its youth need to be strong enough to support their distinct consumption preferences as well as their entrepreneurial endeavors.

Regardless of these challenges, innovation and open collaboration still have the potential to reshape China's global identity. Importantly, economic growth driven by these factors may be more evenly distributed and idiosyncratic, and therefore less cyclical, compared to China’s old economic engines of real estate, infrastructure and production capacity investments.

No longer just the world's factory, China is becoming a source of culturally resonant innovation. And as America’s track record over the past decades suggests, no one should underestimate the value of cool.

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