The China Rally's Second Act: Why the Plenum Changes Everything

What happened

The Communist Party's Fourth Plenum is currently underway in Beijing. Behind closed doors, 370 Central Committee members are finalizing the 15th Five-Year Plan (2026-2030). Official ratification is scheduled for the National People's Congress in March 2026.

But provincial governments have already moved: RMB200bn+ ($28bn) are being readied in provincial tech spending thanks to the 2024 debt swap program that freed new resources for tech procurement on top of existing budgets. 

The +42% return of our China Tech strategy since inception in February 2025 was built on market moves driven by leaked drafts and provincial pilot programs. But the main course gets served this week.

Impact on our Investment Case

Three Phases of Capital Reallocation Drove the First Act

Phase 1: Liquidity Foundation (Nov 2024 - Jan 2025)

The November 2024 debt swap announcement freed up ~RMB120bn ($17bn) annually in interest savings

• Provincial governments gained breathing room for discretionary spending, with incentives to focus on tech procurement
• Bond yields compressed as Local Government Financing Vehicles (LGFVs) risk perceptions improved
• Banking sector freed from ~RMB2tn ($280bn) of questionable assets

Traditional government contractors who pivoted to tech services saw contract values surge 40-60% as provinces redirected spending from debt service to innovation KPIs. As a result, related stocks rallied 15-25%.

Phase 2: Capital Rotation (Jan-Mar 2025)

Foreign investors remained cautious, while domestic retail began shifting savings from deposits (with bank rates hitting historic lows) to financial assets. Chinese household savings are estimated at ~RMB160tn ($22,5tn): even a 1% shift would mean ~RMB1.6tn ($225bn) into markets. 

• Real estate is no longer attractive
• Bank deposit rates are at historic lows
• Winners: Consumer tech and financial platforms

Phase 3: Policy Anticipation (Apr-Oct 2025)

Markets positioning ahead of Fourth Plenum and 15th Five-Year Plan. 

• Provincial pilot programs launching 
• "Anti-involution" campaign targeting overcapacity, benefitting efficient producers
• SOE reform creates acquisition opportunities

State-owned enterprises saw profits jump 50% year-over-year in August 2025, compared to just 13.2% for private firms, as consolidation accelerates. China "national team" investment fund had actively deployed capital in the stock markets, reaping $50bn profits. 

The pattern is clear: in each sector, 3-5 champions are emerging while marginal players face credit restrictions and forced mergers.

The $2 Trillion "Mandate" Nobody's Calculating will Drive the Second Act

Looking forward, the implementation of government policies currently being formalized creates unprecedented, "forced buying", aiming at boosting the Chinese economy. 

R&D growth trajectory: ~$100bn annually

Targeting an R&D intensity of ~3.2% of GDP by 2030 (that compares to the ~3.5% in the U.S. currently), it translate into China adding ~$480bn in cumulative R&D spending over the period.

Strategic sectors like AI, EVs, and clean energy are already receiving directed credit and policy support. High-tech manufacturing value-added grew 9.5% YoY in H1 2025, and as an example the semiconductors industry has been allocated RMB200bn+ ($28bn) in government funds over the past year. 

Digital infrastructure: ~$300bn+ annually

Core digital economy represents ~10% of GDP. Broader digital transformation (including e-commerce, digital payments) affects ~30% of economic activity. Targeting 15% of GDP for digital economy core industries by 2030 requires ~$1.5tn+ in cumulative investment.

Provincial tech programs: ~$30bn annually

China aims to achieve near-universal AI adoption in strategic sectors by 2030. The 2024 debt swap program covering ~RMB10tn ($140bn) of local debt saves ~RMB600bn ($84bn) in interest over 2024-2028, with ~RMB50-60bn ($7-8bn) annually freed for tech procurement. Combined with regular budgets, they sum up to ~RMB200bn+ ($28bn) in annual provincial spending, which will be prioritised towards tech.

Over the next 5 years, all this spending is expected to cumulate to ~$2tn, and we wouldn't be surprised if it gets increased over time, given the strategic importance of innovation for China, and the available resources. That's structural reallocation equivalent to Canada's or South Korea's entire economy.

The AI Mandate That Changes Everything

AI adoption rate in key areas has been targeted at 90% by 2030, with ~5,000 major State-Owned Enterprises (SOEs, with revenues >RMB1bn) expected to invest RMB-50-100mn ($7-14mn) each. But there are ~150k SOEs in China, and the AI adoption (by 2026) has been mandated at a state level. Not pilots but actual deployment.

Examples from running pilots:

• State Grid: Implementing AI across 1,100+ cities for demand forecasting and grid optimization (iFlytek)
• PetroChina: AI-powered drilling optimization for ~8k wells reducing exploration costs by 30-40% (SenseTime)
• China Railway: World's largest AI-maintained rail network (40'000 km), preventing 80% of track faults (Cambricon)

The size of procurement spending is simply staggering.

Platform Rehabilitation: From Pariah to Utility

After destroying $2tn in Big Tech market cap (2021-2024), Beijing's rehabilitation framework says: "You can grow again, but on our terms."

New rules:

• 30% of R&D must support national priorities
• Must open APIs to competitors
• 70% procurement from domestic suppliers by 2027
• Share anonymized data with government institutes

This forces Alibaba Cloud to buy from local server makers. Tencent must open WeChat to local fintech startups. It's wealth transfer from mega-caps to mid-caps.

Provincial Competition Driving Tech Investment

China's cadre evaluation system has fundamentally shifted priorities. Leadership is now evaluated on technological innovation and strategic industry development, marking a departure from the traditional GDP-focused assessments. 

Miss innovation targets? Careers die in the provinces. We analyzed 31 provincial budgets: tech allocation +47% YoY. They're not waiting, they're spending:

• Multiple provinces have launched substantial tech funds: Jiangsu (RMB 300bn), Shenzhen (RMB 200bn)
• Provincial governments competing to attract tech companies with subsidies
• Visible shift from infrastructure spending to innovation funding

Our portfolio's structural edge

We're not smarter. We're fishing where the fish are:

Tracker characteristics:

• Median weighted market cap: $19.2bn (vs $31bn for Hang Seng Tech)
• Revenue growth: 34% (vs 18%)
• R&D intensity: 18% (vs 12%)
• Government contracts: 67% have them (vs 23%)

Star performers:

• Cambricon: +273%, AI chips, railway ministry contract
• Naura: +156%, semiconductor equipment, breaking ASML monopolies
• United Image Healthcare: +134%, medical equipment, beating GE in MRI

Valuation disconnect:

• Our portfolio: 19.2x P/E, 34% growth, 0.56 PEG
• US tech: 38x P/E, 16% growth, 2.4 PEG

Historical precedent (Korea 1998, Taiwan 2001): gaps this wide close within 18 months.

Risks

• The Fed breaks something: 10-year Treasury at 4% to 4.5% manageable. At 6%, dollar liquidity reverses, draining $200bn per 50bps from emerging markets.
• Yuan devaluation: Beijing could drop to 8.5 vs dollar. Equities rally 30% in yuan, fall 20% in dollars.
• Sanctions reversal: If ASML/Nvidia restrictions lift, import substitution thesis weakens. Though post-Huawei's 7nm breakthrough, damage may be done.

Catalysts

• Plenum communiqué (this week): Official confirmation of capital allocation
• Xi/Trump meeting: softer tones from the US administration would sooth investor fears
• Q3 earnings (Oct 25-Nov 15): Our names guiding 31-37% vs consensus 18%
• MSCI rebalancing (November): 17 of our 35 holdings face inclusion upgrades
• National team holdings expansion: Currently 3% of free float vs 6% in 2015

Our Takeaway

Foreign ownership of Chinese equity sits at 3.7% versus 8.2% at the 2015 peak and 38% for Korea at MSCI completion. We're playing with 4% of eventual participants.

The Plenum happening this week is directing trillions in spending toward exactly the sectors we own. The governance structure (promotions tied to execution) guarantees implementation. The liquidity setup provides fuel.

We launched at $100 on February 4, 2025. We're at $142 today. Based on what the Plenum allocations details will be, fair value ranges from $200 to $250.

Act One cleared the plumbing. Act Two is being written in Beijing as you read this.

The biggest risk? We might be underinvested.