In the rapidly evolving landscape of global finance,a spotlight is now firmly placed on China,particularly following the recent emergence of a cutting-edge artificial intelligence system named DeepSeek.Goldman Sachs has seized this moment,presenting a fresh analytical framework for investing in Chinese equities driven by AI advancements.Their latest report,dated February 17,authored by distinguished analysts including Kinger Lau,underscores a transformative shift in the narrative surrounding Chinese technology—significantly fueled by DeepSeek-R1 and other competitively priced Chinese AI models that have emerged on the global stage.This evolving narrative has fostered a renewed optimism among investors regarding the growth potential and economic benefits of AI in China.

Goldman Sachs estimates that the widespread adoption of AI could enhance the earnings per share (EPS) of Chinese companies by an impressive 2.5% annually over the next decade.Such positive projections,coupled with potential boosts in investor confidence,could elevate the fair value of the Chinese stock market by as much as 15-20%,potentially attracting an influx of over $200 billion in portfolio investments.Notably,Goldman has revised its target prices for the MSCI China Index and CSI 300 Index to 85 and 4,700,respectively,suggesting an anticipated upside of 16% and 19% within a 12-month horizon.

Despite the profound potential that AI possesses in reshaping China's growth trajectory,Goldman Sachs cautions that robust policy stimuli are necessary to address macroeconomic challenges and deliver sustainable returns in the stock market.The report introduces a comprehensive investment framework encompassing six thematic sectors wherein AI investments are poised to flourish.This includes critical areas such as semiconductors,infrastructure,data and cloud computing,software and applications,as well as revenue-enhancing and productivity-boosting segments.

In its analysis of DeepSeek and the corresponding opportunities that arise in the Chinese AI ecosystem,Goldman Sachs emphasizes the different exposures in offshore stocks compared to A-shares regarding the AI theme.Over the past month,offshore stocks have outperformed A-shares,indicative of their increased susceptibility to AI developments.Within major benchmark indices,the Hang Seng Tech Index,CSI 1000,ChiNext,and Sci-Tech 50 have emerged as more tech- and AI-focused,indicating a richer potential for growth in these areas.Currently,Goldman Sachs shows a preference for the data and cloud computing,as well as software and application sectors.

The framework developed by Goldman Sachs aims to present investors with a structured perspective on the dynamics that characterize China's AI ecosystem within the broader stock market.The analysis begins by categorizing the $14 trillion total market capitalization of Chinese stocks into two overarching categories: AI technology and non-technology sectors.

Specifically,in the realm of AI technology,the framework further delineates the $6 trillion market cap based on industry classifications and the nature of their operations within the tech supply chain.Industries are segmented into semiconductors (including software design),infrastructure (hardware,data storage,cooling systems),data and cloud (for instance,internet platform companies),and software and applications (which cover autonomous vehicles,biotechnology,humanoid robotics,and internet service providers).

On the flip side,non-technology sectors,accounting for a $7 trillion market cap,are divided into two main segments: revenue enhancers,which have higher capital expenditures and research and development investments slated for future growth,and productivity boosters,which may leverage technology to improve operational efficiency and profitability due to their labor-intensive cost structures.

Lastly,Goldman Sachs sorts various sub-industries and thematic groups based on their relative price sensitivity concerning industry giants like NVIDIA and Meta Platforms (previously known as Facebook).This comparative analysis offers a clearer understanding of how Chinese industries and AI agents are engaging with the two dominant trends in the tech landscape: capital expenditures and applications,thus aiding investors in navigating this dynamic ecosystem effectively.

Based on the aforementioned framework,Goldman Sachs has made several key observations.Firstly,in response to the broader U.S.AI cycle,Chinese technology infrastructure and semiconductors have shown remarkable performance over the past two years,bolstered by substantial capital investment in global computing capacity enhancement and upgrades.

Both segments currently trade above mid-cycle valuations,suggesting that optimism surrounding AI and China’s self-sufficiency in technology appears to be already reflected in their pricing.As capital expenditure in foundational technologies grows at a more moderate pace,there’s a belief that DeepSeek will accelerate AI adoption in China,potentially shifting investor attention away from semiconductors and infrastructure towards data and cloud computing,as well as software and applications—segments that currently trade below mid-range and demonstrate stronger potential for profit growth.

In the context of the tech cycles in both the U.S.and China,sectors classified as revenue enhancers and productivity boosters have lagged behind,possibly due to the uncertainties surrounding the balance of costs and benefits brought forth by AI,as well as socio-economic considerations such as labor reduction and deflationary pressures.

As investment strategies evolve,investors will remain vigilant regarding fundamental and policy-related factors as they inch closer to capitalizing on these potential late-stage beneficiaries of AI until such benefits can be quantified and demonstrated more robustly.With the rapid development of AI technologies and their integration into the core of economic strategies,the landscape is poised for significant transformation,not just for China but for the global economy at large.