By Reshma Kapadia

Chinese stocks are rising despite a long list of woes in the world's second-largest economy. The U.S. has imposed 10% tariffs on all Chinese goods and a 25% levy on steel and aluminum exports, China's military and strategic competition with the U.S. is heating up, and there is frustration over domestic policy.

So what's behind the improving investor sentiment?

When so little is expected, it doesn't take much to move the market -- and that is what China could be seeing so far this year. The iShares China Large-Cap ETF is up 11.4% to $34.80 and Alibaba Group, a proxy for Chinese stocks for U.S. investors, is up 43%.

Few of the issues that have kept investors wary have abated. But the worst-case scenarios haven't panned out -- yet. While President Donald Trump had threatened 60% tariffs on all Chinese goods, the moves out of the gate have been harsher against other countries. And the 10% levy on Chinese imports the administration imposed, citing fentanyl flows, is far smaller than markets had expected.

More tariffs could be coming, with the administration due to report back on China's compliance with the Phase One trade deal struck in Trump's first term by April 1. Also still in the mix: the prospect of reciprocal tariffs that impose the same amount of levies others have on the U.S.

But analysts say Trump's first couple weeks have underscored the idea he is indeed "dealmaker in chief," leaving Beijing some room to maneuver as it comes up with ways that could ward off tariffs in the way other countries have been able to so far.

That dealmaking could include a plan for TikTok and an agreement to purchase more U.S. goods or build manufacturing in the U.S.

Gavekal Research co-founder Louis-Vincent Gave, in a note to clients, posits Beijing could even address Trump's recent complaints that China controls the Panama Canal. Hong Kong-based conglomerate CK Hutchison controls some of the critical ports along the way.

All together, Gave notes a "vibe" shift among U.S. clients who have been pretty dismal about China thus far. In a note to clients, he credits part of that shift to DeepSeek's success shining a light on some of China's other advances, from car maker BYD's autonomous driving system to China's sixth-generation fighter aircraft and growing nuclear industry.

"None of this is to say that China is out of the woods yet," he writes. "Nevertheless, for the first time in a long while, most investors I met on the road in the U.S. seem open to the idea that China's unfolding bull market -- which now encompasses almost all sectors and which is being driven by positive headlines on tech, the auto sector, the power distribution sector, the financial industry and others -- may well have legs." Alibaba is playing its part in this shift, with the stock benefiting from DeepSeek's success and getting another boost this week after Chairman Joseph Tsai said Apple will use Alibaba's AI technology in its phones.

That decision validates Alibaba's AI capabilities, writes Citi analyst Alicia Yap. She expects Alibaba to get a boost from app developers who upgrade or release AI-oriented apps on the iPhone and opt for Alibaba's chatbot service Qwen and AliCloud as their model or cloud service. Even with the year to date run-up, she sees further gains ahead, with a target price on Alibaba of $138, compared with its current $122.40.

Beyond the AI buzz, some analysts also see glimmers of hope in the China's property market amid reports by Bloomberg that authorities could shore up China Vanke, long seen as a well-run private sector developer. Vanke's 45 billion renminbi loss and 30 billion renminbi in debt maturities this year underscores how the recovery is still bumpy four years into a property slump. A bailout would be a positive, especially if Beijing made it clear it was going to sort out developer debt issues rapidly and systematically -- bailing some out, consolidating others, clearing the market and maybe creating a bad debt institution to take on dodgy assets, says Duncan Wrigley, Chief China+ Economist for Pantheon Macroeconomics via email. He expects Beijing to continue rolling out both property and stock market support.

That support combined with the prospects for a less than worse-case outcome with the U.S. on trade in the near-term and the AI glow provide some opportunities for nimble investors looking to rebuild some Chinese stock exposure.

One note of caution: China's overreliance on exports in an increasingly protectionist world, escalating rivalry with the U.S., and a debt-laden economy where Xi Jinping has tightened control will limit the potential.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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February 15, 2025 03:30 ET (08:30 GMT)

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