As economic split-screens go, surging Chinese stocks are one for the ages.<\/p>\n
On one, Shanghai shares<\/a> are testing 10-year highs as the market races past the S&P 500 and other top global bourses. On the other, an underlying economy is struggling under the weight of a deflation-generating property crisis, weak household demand and an aging population.<\/p>\n The disconnect, though, isn\u2019t turning off the Shanghai bulls. This is, in part, thanks to optimism that President Xi Jinping\u2019s Communist Party is going all-in on artificial intelligence investment.<\/p>\n Xi\u2019s pledge to put China at the forefront of global AI penetration, even using the party\u2019s \u201cunwavering\u201d phraseology to demonstrate resolve, has many investors playing the AI long game.<\/p>\n Alibaba Group\u2019s stock surge may tell the story. On August 29, China\u2019s e-commerce leader reported an AI-driven revenue surge<\/a>, the latest sign that Alibaba is making serious headway against rivals since the DeepSeek shock earlier this year.<\/p>\n Alibaba said AI-related product revenue \u201cmaintained triple-digit year-over-year growth for the eighth consecutive quarter.\u201d<\/p>\n Like many Chinese tech companies, the juggernaut Jack Ma co-founded has been investing aggressively in AI infrastructure, while offering an array of AI services involving its cloud computing business. Investors view the unit as key to Alibaba\u2019s ability to monetize AI.<\/p>\n In the quarter ending June,\u00a0cloud computing revenue jumped an annualized 26%, an acceleration from the previous three months. Overall, Alibaba\u00a0posted revenue<\/a>\u00a0of nearly US$35 billion in the second quarter \u2014 a 2% year-on-year rise. Net income jumped an annualized 78%.<\/p>\n Between the DeepSeek Sputnik moment in January and Alibaba now, the \u201cMade in China 2025\u201d extravaganza that Xi launched in 2015 is scoring its biggest public relations wins to date. Nine months ago, DeepSeek\u2019s arrival on the scene generated the best headlines Xi\u2019s economy had in a long while.<\/p>\n DeepSeek\u2019s promise of a cost-effective AI model using less-advanced chips had America\u2019s Nvidia and Dutch chip-making equipment giant\u00a0ASML<\/a>\u00a0reeling. It also knocked the chips off the shoulders of Silicon Valley bros cozying up to US President Donald Trump. Suddenly, US tech dominance was in question as rarely before.<\/p>\n DeepSeek\u2019s arrival<\/a>\u00a0also managed to eclipse Trump\u2019s big AI event at the White House in January. Trump stood with OpenAI\u2019s Sam Altman,\u00a0SoftBank\u2019s Masayoshi Son and Oracle\u2019s Larry Ellison, declaring victory over AI. DeepSeek made Trump\u2019s ballyhooed $500 billion Stargate AI infrastructure project look like old hat.<\/p>\n China Inc\u2019s big win provided an even greater incentive for Team Xi to accelerate moves to raise the nation\u2019s innovative game. For Trump World, DeepSeek was a stark reminder that tariffs won\u2019t revitalize US tech entrepreneurship in ways that equalize the China threat. Only bold policy moves can do that.<\/p>\n Now here comes Alibaba to prove that Xi\u2019s 2015 strategy to increase China\u2019s global footprint in technologies of the future, including biotechnology, electric vehicles<\/a>, renewable energy, semiconductors and now AI, is paying dividends.<\/p>\n Take BYD. Though the EV upstart that last year surpassed Elon Musk\u2019s Tesla had a rough second quarter \u2014 revenues plunged a staggering 30% \u2014 China\u2019s auto revolution continues to upend the global auto market.<\/p>\n Alibaba is also turning heads by finding ways to capitalize on AI with the best of them, including OpenAI, Google and Microsoft. The Shanghai stock surge owes much to these tech wins.<\/p>\n The $50 billion stock rally that Alibaba triggered helped calm investor fears about the costs of the intensifying battle for e-commerce with Meituan and JD.com. The AI arms race has Western tech giants Alphabet, Amazon, Meta, Microsoft, Nvidia, Tesla and others investing aggressively.<\/p>\n Yet the \u201cold economy\u201d part of the split-screen matters, too. The reason investors are debating whether Shanghai shares<\/a> are getting ahead of their skis is China\u2019s unbalanced economy.<\/p>\n The return of China Evergrande Group to global headlines is the last thing Asia\u2019s biggest economy needs. Late last month, China\u2019s top property developer had its shares unceremoniously removed from the Hong Kong Stock Exchange.<\/p>\n On August 28, Fitch Ratings downgraded China Vanke Co, citing \u201cfurther weakening\u201d of the homebuilder\u2019s liquidity. Fitch analyst Rebecca Tang says it\u2019s \u201cessential for China Vanke to address its financial obligations, as Fitch forecasts its free cash flow to remain negative in the near term.\u201d<\/p>\n Trouble is, there are dozens of giant developers across China\u2019s $18 trillion economy facing the same exact pressure as domestic demand slows.<\/p>\n Economist Sunny Kim Nguyen at Moody\u2019s Analytics points out that \u201csentiment is gloomy as firms grapple with weak demand and squeezed margins. A temporary trade truce with the US has offered some respite, but sporadic US threats are keeping the [manufacturing] sector on edge.\u201d<\/p>\n Risks emanating from abroad are colliding with numerous pre-existing conditions at home. China\u2019s property crisis resulted in the longest\u00a0deflationary streak<\/a>\u00a0since the 1997-98 Asian financial crisis. Weak household demand and\u00a0near-record\u00a0youth unemployment are slamming confidence.<\/p>\n Things may soon get much worse if Trump decides to raise the current 30% tariff rate should Xi play hard to get on a US-China trade deal. So far, Trump has\u00a0moved much slower<\/a>\u00a0in deploying trade curbs than global investors expected.<\/p>\n These risks only increase the urgency for Xi\u2019s team to stabilize China\u2019s\u00a0financial system<\/a>. Immediate priorities include repairing a weak property sector that fuels deflation, building more vibrant capital markets, reducing youth unemployment, addressing runaway local government debt, curbing the dominance of state-owned enterprises and increasing transparency.<\/p>\n Team Xi also must create a vibrant network of social\u00a0safety\u00a0nets\u00a0to encourage consumption over saving.<\/p>\n In recent months, Xi\u2019s government intensified efforts to support China\u2019s volatile stock markets by encouraging pensions and mutual funds to invest more in domestic stocks and prodding mainland households to buy more shares.<\/p>\n Such steps are only necessary, though, because Team Xi has been too slow to address the economy\u2019s pre-existing conditions. One big debate in financial circles is whether Beijing might resort to weakening the yuan to boost economic growth.\u00a0<\/p>\n The pros are obvious. A weaker exchange rate would further boost exports, a key reason why China<\/a> may reach 5% growth this year.<\/p>\n Yet the cons are stopping Team Xi from going the weaker yuan route. For one thing, it might make it harder for highly indebted property developers to make payments on\u00a0offshore bonds<\/a>.<\/p>\n That would increase\u00a0default\u00a0risks\u00a0in Asia\u2019s biggest economy. Seeing #ChinaEvergrande trending again is not what Xi\u2019s party wants in 2025.<\/p>\n For another, the monetary easing required to depress the yuan could squander years of deleveraging efforts. In recent years, Beijing has made important strides in reducing China\u2019s financial excesses and improving the quality of gross domestic product.<\/p>\n