Reevaluating China's manufacturing sector

Since the surge in artificial intelligence agents, particularly the maturity of coding agents, it became evident that the economic benefits of AI investment are currently limited, but that AI could have a significant impact on the traditional enterprise service sector and cause structural damage to employment. According to tech sector data portal The Information, when ChatGPT internally displayed a list of purchasable products, the proportion of users clicking the buy button was less than 1 percent, significantly lower than the average conversion rate of 3-4 percent on e-commerce websites. The asymmetrical impact of AI development on the production side and the demand side is a reality that must be confronted.

As investors grapple with the long-term structural shifts of the AI revolution, we are seeing an immediate impact on capital flows in the US stock market: a defensive surge into HALO (heavy assets, low obsolescence) assets contrasted by a significant valuation reset for SaaS (software as a service) providers. The strategy behind HALO trades is to identify defensive stocks that can avoid damage to free cashflow or pressure on declining capital return rates in the face of AI's disruptive innovation — essentially serving as a passive defensive switch.

The disruptive impact of AI innovation on China is somewhat less than that on the US and Europe. The proportion of the services sector, which is most vulnerable to the impact, in the total employed population in China, the US and Europe is 48.8 percent (65 percent in urban areas), 79.0 percent and 73.5 percent, respectively. China's economic reliance on services is significantly lower than the US and Europe. Moreover, the three sectors with the highest employment in China's production-oriented services (internet, finance and real estate) have already undergone deep adjustments.