(The views expressed here are those of the author, a portfolio

manager at Fidelity International.)

By Taosha Wang

HONG KONG, July 28 (Reuters) - The first seven months of

2025 have delivered a whirlwind of news on Chinese technology

and business, oscillating between anxiety and euphoria, but what

has cut through the noise has been the emergence of a "cool

factor".

In January, TikTok suspended its U.S. services for one day,

when the outgoing administration shut down the app due to its

ties to China, before the decision was swiftly reversed by the

incoming Trump administration.

Days later, Chinese artificial intelligence company DeepSeek

shocked the world with its cost-effective, high-performance R-1

reasoning model, triggering an intense debate about who will

lead the "AI race".

And then in early May, U.S.-China tensions reached

unprecedented heights, as tariffs jumped above 100%, effectively

halting bilateral trade, before de-escalation.

By summer, however, China was once again exporting critical

rare earth to the U.S. and Nvidia ( NVDA ) had re-started the sales of

its AI chips to China, suggesting a burgeoning trade detente

between the world's two largest economies.

Amid this volatility, China's capital markets have responded

favorably. The MSCI China Index has surged around 25%

year-to-date through July 25, outpacing the MSCI All-Country

World index's 12% gain and the S&P 500 index's 9% rise.

Notably, this strong performance has been driven not just by

typical business-cycle fluctuations, but also an appeal rooted

in innovation, collaboration and youth culture, suggesting

China's next growth cycle could look very different from those

in the past.

IMITATOR TO INNOVATOR

China's evolution from low-cost imitator to global innovator

is epitomized by its electric vehicle dominance. Chinese EV

leader BYD, which began as a battery maker and currently has a

market cap of $150 billion, was once dismissed by Elon Musk for

its unattractive products and weak technology.

However, a decade of development, supported by state-backed

infrastructure including China's 10-million-strong charging

network, has propelled BYD past Musk's Tesla in global sales. In

2024, one of every five EVs sold globally was from BYD, whose

market share is now double that of Tesla's. Moreover, BYD's

vehicles, like many other Chinese EVs, now boast the type of

sleek designs and novel amenities associated with its U.S.

rival.

Beyond product innovations, some Chinese companies are also

experimenting with new business models and sales strategies.

For example, livestream social shopping, which was pioneered

by Alibaba ( BABA ), has been adopted by Amazon ( AMZN ), Instagram, YouTube and

even Walmart ( WMT ) (in collaboration with TikTok) in the U.S. to

target Gen-Z and millennial shoppers.

New players like Chinese toymaker Pop Mart ( POPMF ) are also

experimenting with fresh business models. Its designer toys are

sold in mystery boxes, where sealed packages conceal randomized

plush "Labubu" figures, which adorn the luxury handbags of many

influencers.

This strategy seeks to tap into the thrill of uncertainty,

creating viral demand beyond the Chinese domestic market. And

this appears to be working. Pop Mart's ( POPMF ) sales from outside

mainland China contributed to nearly 40% of its total revenue in

2024, and its profit in the first half of 2025 is expected to

soar by at least 350% year-over-year.

OPEN-SOURCE ARCHITECT

Historically, tensions surrounding intellectual property

have dogged China's global trade relationships. Today, however,

its embrace of open-source collaboration appears to signal a

profound shift.

China is now the fastest-growing and second-largest

contributor of open-source code on GitHub, the world's leading

platform for software collaboration. Moreover, Chinese tech

giants like Huawei and Tencent ( TCTZF ) rank among the top corporate

sponsors of Apache and Linux foundations, major nonprofit

organizations that shape foundational technologies like

artificial intelligence and cloud computing.

DeepSeek's R-1 model exemplifies this strategy. Released

under the permissive MIT license, it grants large-scale

commercial reuse rights (unlike Google's Apache 2.0 or Meta's

Llama licenses) and has fueled countless derivative models

globally. Such openness has the potential to build developer

loyalty, influence AI standards, and circumvent geopolitical

friction.

This shift has been underpinned by a focus on developing

scientific prowess. In 2024, China led the world in high-quality

research publications, according to Nature, holding the top spot

for the second consecutive year. Its advantage in publications

extends even to semiconductor design and fabrication, a field

where U.S. technological superiority is often assumed, with

Chinese scholars authoring over half of the most-cited papers in

this field in 2024.

STRUCTURAL HEADWINDS

However, the outlook for the country's businesses is not all

rosy. Industrial profits are still shrinking, falling 1.1%

year-to-date, despite various government stimulus measures,

including a recently expanded consumer subsidy scheme and a

central bank-backed initiative for state-owned enterprises to

buy unsold homes.

And price wars in sectors such as EVs and food delivery have

gotten so brutal that the authorities have stepped in to mediate

"irrational" competition.

Another structural issue is the country's stubbornly high

youth unemployment rate (16-24-year olds excluding students),

which remained at 14.5% - well above the 5% rate for the labor

force as a whole.

If China's future growth is to be driven more by a "cool"

factor, then the career prospects of its youth need to be strong

enough to support their distinct consumption preferences as well

as their entrepreneurial endeavors.

Regardless of these challenges, innovation and open

collaboration still have the potential to reshape China's global

identity. Importantly, economic growth driven by these factors

may be more evenly distributed and idiosyncratic, and therefore

less cyclical, compared to China's old economic engines of real

estate, infrastructure and production capacity investments.

No longer just the world's factory, China is becoming a

source of culturally resonant innovation. And as America's track

record over the past decades suggests, no one should

underestimate the value of cool.

(The views expressed here are those of Taosha Wang, a

portfolio manager and creator of the "Thematically Thinking"

newsletter at Fidelity International).

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(Writing by Taosha Wang; Editing by Anna Szymanski and Lincoln

Feast.)