(The views expressed here are those of the author,

the founder and CEO of Emmer Capital Partners Ltd)

By Manishi Raychaudhuri

HONG KONG, May 18 (Reuters) - "China is back" is a

common refrain among investors, who point to the success of the

country's foundational artificial intelligence companies and the

ongoing rebound of its economy from a three-year deflationary

funk. However, stock-picking in China remains as hard as ever.

China certainly does appear to be breaking out of its slump.

First-quarter gross domestic product grew 5.0% year-on-year, up

from a three-year low of 4.5% in the fourth quarter, on the back

of strong manufacturing and exports. Consumer spending remains

patchy and property continues to slide, though high-tech

manufacturing is helping offset the drag.

Beijing's efforts to upgrade the country's economy over the past

decade through investment in advanced technology, green energy

and high-end manufacturing have clearly paid off.

These efforts are also showing up in China's stock market.

Three of the eight Hong Kong-listed sectors that have

outperformed the market through mid-May - industrials,

technology and process industries - all sit at the intersection

of Beijing's policy priorities.

Within the sector, performance diverges sharply. China's two

largest electric-vehicle makers BYD and Geely

were up 2% and 19%, respectively, in the year through mid-May,

buoyed by premium products and strong exports. Smaller rivals

Xiaomi ( XIACF ) and XPeng ( XPEV ) fell more than 20% in that

time, weighed down by margin fears as the price war in the

industry has intensified.

AI is obviously one of Beijing's key priorities - and a

major driver of equity market performance. But, here again,

caution is warranted, as "AI losers" are emerging in China, too.

Following the launch of Anthropic's Claude AI platform in early

2026, shares of some Chinese platforms serving tourism and

online music - Trip.com ( TCOM ) and Tencent Music

among them - nosedived and have not recovered.

Meanwhile, several policy-targeted sectors have underperformed.

Technology services - home to AI giants Tencent ( TCTZF ),

MiniMax ( MNMXF ) and Baidu ( BIDU ) - dropped 17% in the year

through May 15, reflecting investor anxiety over high

development costs, intense competition and doubts over near-term

profitability.

Putting one's money on market leaders has also not always

worked. China's largest chipmaker SMIC was down over 5%

in the year through mid-May on concerns about heavy capital

expenditures, while smaller rival Huahong Semiconductor

was up a striking 56%.

INVOLUTION SOLUTION?

Another key Beijing priority over the past year has been

stamping out "involution" - overcapacity and deflation arising

from soft domestic demand and disorderly, excessive competition.

The results have been mixed, however, creating both

opportunities and pitfalls for investors.

Nowhere is involution more starkly apparent than in EVs.

Almost a year after Chinese authorities warned EV makers to end

their fierce price war, discounts keep coming. Throughout 2026,

top manufacturers have offered 10% to 15% price cuts in the face

of massive overcapacity and declining auto sales.

Investors may therefore consider trying to avoid "involution

losers" - those firms apt to continue bearing the brunt of this

fierce competition. But that is easier said than done.

One option would be to focus on companies that are

neutralizing the pressure on their domestic margins by expanding

high-value exports.

Geely and BYD both appear to be in this camp, having each

expanded aggressively abroad in recent years. BYD posted a 56%

year-on-year rise in exports in the first quarter of 2026, with

Geely boasting a 126% jump.

Of course, for companies to pursue this strategy successfully,

they will need to navigate geopolitical fault lines in a world

of mounting trade barriers.

Companies that successfully locate production facilities abroad

- and focus on the international market more broadly - may be

better positioned, as this strategy could enable them to both

sidestep trade friction and capture global margins rather than

risk getting pulled into a "race to the bottom" in the domestic

Chinese market where demand remains muted.

BYD's plants in Hungary, Brazil, Turkey and Thailand may serve

this purpose. So could Geely's factories in Europe and its

intended acquisitions in Mexico. Battery leader CATL

is following the same path with its gigafactory in Hungary.

POLICY WINS

Some of Beijing's other efforts to boost efficiency and

innovation are also bearing fruit.

For example, in the solar energy industry, government-encouraged

consolidation has pushed more than 40 smaller firms into

bankruptcy or acquisition - rationalizing a bloated sector.

Shares of large, vertically integrated solar firms have

benefited from the consolidation, with sector leader Jinko Solar

up more than 20% over the past 12 months.

Meanwhile, in biotech, the National Medical Products

Administration (NMPA) has implemented faster approval timelines

and aligned its standards with international bodies such as the

International Council for Harmonisation in July 2024.

The resulting acceleration in clinical trials and rise in deals

where global pharmaceutical companies license rights to

commercialize Chinese-developed products elsewhere have driven

Chinese biotech ETFs sharply higher this year.

China's large market clearly features myriad positive

drivers - many of which could prove durable.

That being said, the risks should not be overlooked. Rising

geopolitical tensions with the U.S. could potentially lead to

higher tariffs and export restrictions. Disorderly competition

could also rear its ugly head, even in sectors seeing nascent

benefits of the "anti-involution" drive.

China may be back, but policy- and news-driven volatility has

not disappeared. Investors thus need to proceed with caution -

and not skimp on the due diligence.

(The views expressed here are those of Manishi Raychaudhuri, the

founder and CEO of Emmer ​Capital Partners Ltd and the former

head of Asia-Pacific Equity Research at BNP Paribas Securities.)

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(Writing by Manishi Raychaudhuri;

Editing by Anna Szymanski and Marguerita Choy)