China: new consumer trends

• Wenli Zheng
  Portfolio Manager for the ‘China Evolution Equity Strategy’.”
  T. Rowe Price

Within this focus, we target two specific opportunity sets. The first includes areas with continuous specification upgrades, which drive rapid content value growth and favorable competitive dynamics. Key examples include optics, power supply, PCBs, and chip testing. These businesses are likely to outgrow overall AI investment over the next 1–2 years.

The second set comprises areas with supply constraints or bottlenecks, which tend to confer pricing power and margin upside. Examples include semiconductor substrates, PCB materials, and power generation equipment. These require active position management.

The recent emergence of AI agents has driven a substantial increase in token consumption. Model providers and cloud companies have also seen accelerating revenue growth, creating a closed loop that could help improve the sustainability of AI investment. Our comprehensive channel checks across the supply chain indicate that the current upcycle is expected to extend well into the next 1–2 years.

From a technology development perspective, beyond our positive views on optics and power supply, the emergence of agents has driven accelerated growth in server CPUs. It is also becoming increasingly clear that clean rooms will likely be a new bottleneck over the next 2–3 years.

In addition, our ongoing risk-reward assessment centers on two key factors: (1) where we are in the current cycle, and (2) the technology roadmap—specifically, which parts of the AI ecosystem are better positioned for the next phase. Answering these questions requires comprehensive research across the entire ecosystem, including model labs, start-ups, hyperscalers, chip design, and the hardware supply chain. This is truly a global effort across our research platform to piece together different parts of the puzzle.

China Consumer: Divergence Continues

While overall consumption has been muted over the past few years, there is significant divergence beneath the surface. Lower-tier cities have shown more resilience than top-tier cities. There are also notable differences across age groups: the middle class in top-tier cities has been negatively impacted by the weak property market, while younger generations and retirees are demonstrating strong demand for their respective consumption preferences.

Although traditional consumer segments have not performed well, structural opportunities do exist. These include companies exposed to faster-growing segments (travel, entertainment, IP[2]-related consumption) and share gainers with innovative business models (discount stores, fresh drinks).

Capturing New Consumption Trends

We look for two types of opportunities in consumer investing. Our primary positions are platform-type businesses operating within structurally growing segments. These companies possess durable advantages in scale and supply chain and can navigate through cycles. They offer sustainable growth and high visibility, driven by unit expansion and same-store sales. Our holdings in shopping malls, hotels, and fresh drink operators are typical examples.

The second type consists of businesses driven by product and brand momentum. They can deliver stronger growth when cycles are in their favor, but sustainability is less certain, so nimble and active stock selection is the key. 

Chinese companies are fast adopters of new technologies, thanks to open-source models, abundant engineering talent, and a fully digitized transaction ecosystem. Examples of AI adoption include faster checkouts, automated inventory replenishment, and AI-powered customer service. Over time, we expect to see more innovative business models emerge.

Whenever a major technology shift occurs, it creates opportunities for nimble companies that can adapt and develop innovative solutions. On the other hand, incumbents’ advantages can be undermined, and organizational inertia may prevent them from moving quickly. We are actively looking for the disrupters in this evolving landscape.