China's Economic Transition Advances as New Economy Sectors create Investment Opportunities

China's structural economic transformation continues, with a widening gap between old and new economy sectors
Artificial intelligence, technological self-sufficiency and ample liquidity are supporting growth in selected manufacturing and resource companies
Electrification, the energy transition, AI infrastructure development, and higher defence spending are fuelling demand for base metals

China is still undergoing a structural economic transformation, but the emergence of the new economy is creating pockets of investment opportunities across select sectors, particularly equipment manufacturers and critical metals.

China's real GDP growth decelerated to 4.3% year-on-year in the second quarter of 2026 from 5.0% in the first quarter, as domestic demand and investment activity remain subdued. To prop up the economy, Beijing has been injecting liquidity into the market through various measures, including maintaining an accommodative monetary policy, expanding fiscal support, and issuing long-term debt. But beneath the weak macroeconomic backdrop lies a growing divergence between the old and new economies. While traditional sectors such as retail sales and property continue to struggle, industries tied to the new economy such as automation, AI, and the semiconductor supply chain, are experiencing robust growth.

Geopolitical shifts are accelerating China's push for technological self-sufficiency. For instance, an earlier news report indicated that Chinese chipmakers are required to use at least half of locally made equipment when adding new capacity. At the same time, support for Chinese equipment makers extends beyond domestic policy. Mounting global demand for AI infrastructure is providing an additional tailwind. Reflecting these trends, China's industrial production rose 5.3% year-onyear in June, buoyed by high-tech manufacturing, while exports surged 23.9% year-on-year in July, exceeding market expectations, partly driven by strong global demand for AI infrastructure.

Equipment manufacturers are benefiting from the rapid expansion of technological modernisation. Chip fabrication and other technological infrastructure buildout require highly specialised equipment, fuelling the earnings momentum for some of these companies. For instance, a leading Chinese etching tool maker posted a 197% year-on-year increase in firstquarter net profit, while a major optical components supplier more than doubled its first-quarter net profit.

Critical materials also warrant investor attention. Rising geopolitical tensions are pushing national security higher on the policy agenda across many countries, with Europe leading the trend after raising military spending by 14% in 2025 military spending. The re-emerging global rearmament cycle is boosting the demand for non-ferrous materials, which are already facing tight supply amid electrification, energy transition, and AI infrastructure buildout. For instance, lithium, already in high demand for electric vehicle batteries and energy storage, is valued for its lightweight properties in powering radios, ground sensors, and guided missiles. Other metals such as copper and tungsten are also critical to the production of defense equipment.

Chinese miners are well positioned to benefit from this global rearmament cycle, given the country's dominant role in the production of critical minerals. China accounts for around 80% of global tungsten production, and about one-third of global copper output. It is also the world's second-largest lithium producer and refines 70% of the world's lithium chemical. Despite price volatility, metal prices have generally remained elevated amid resilient demand and supply imbalances. Strong production volumes and favourable pricing have helped support the earnings of leading miners. A key tungsten producer posted a 264% year-on-year surge in first-quarter net profit, while a major miner with exposure to gold, copper and lithium recorded a 98% jump in first-quarter net profit.

China is still grappling with entrenched economic challenges, with the old economy facing pressure from multiple fronts. Yet, supported by ample liquidity and the emergence of the new economy, pockets of investment opportunities remain within Chinese equities. For investors who are mindful of market uncertainty yet remain optimistic about China's long-term growth potential, focusing on sectors with structural growth drivers and maintaining appropriate diversification remain important strategies for managing risk. A multi-asset portfolio may also provide a more balanced way to participate in these potential growth opportunities.