From U.S. President Donald Trump’s trade war to AI developments, 2025 has been full of dramatic twists and turns. One of the most consequential takeaways is to never, ever underestimate China.
At the onset of the year, the world’s second-largest economy was left for dead. Economists were predicting lost decades akin to what Japan experienced in the 1990s, and its dominance of manufacturing was being challenged by Trump’s second term and the drive by exporters to diversify their supply chains and move operations abroad. Global investors had largely fled, seeing that the country’s 3D problems — deflation, debt and demographics — were structural and insurmountable.
By year-end, the perception couldn’t be any more different. President Xi Jinping was the only foreign leader who stood up to Trump’s bullying tactics on trade and forced him to back down by weaponizing Beijing’s control of rare earth materials. It has kept its status as the world’s most vibrant factory, so much so that some are lamenting that Europe, for one, has nothing to sell to China. As for global money flows, foreigners are returning as an AI boom has lifted the Hong Kong bourse to a four-year high.
How did China manage to shake off its malaise and dazzle the world with DeepSeek moments in tech, biotech and even defense? Were the seeds of success always there and elites in the West simply chose not to see them? It’s a bit of both.
Focus on higher ed pays off
First, Xi’s focus on higher education is finally paying off. These days, roughly 40% of high-school graduates go to university, versus 10% in 2000. Engineering is by far the most popular major for post-graduate studies. As a result, the nation’s talent pool has greatly expanded: Between 2000 and 2020, the number of engineers ballooned from 5.2 million to 17.7 million; in 2022, 47% of the world’s top 20th percentile AI researchers finished their undergraduate studies in China, well above the 18% share from the U.S.
What this means is that by the law of large numbers, innovative breakthroughs are bound to happen, and that China still has the cost advantage in advanced manufacturing. Those under the age of 30 account for 44% of the total engineering pool, versus 20% in the U.S.; compensation for researchers is only about one-eighth that of their American counterparts. Therefore, even if the likes of Apple Inc. want to quit China, they can’t.
Pragmatic productivity
Second, China is pragmatic, and the AI arms race offers a good illustration. Whereas the U.S. is seeking the holy grail — or artificial general intelligence, in this case — Xi is pushing the industry to be “strongly oriented toward applications,” locking in any advantages that AI might bring to sharpen the nation’s edge in manufacturing. Across the country, industrial robots operate in so-called dark factories,” where automation is so efficient that work happens with the lights dimmed. Companies are also using AI to speed up logistics and product-design cycles.
By now, productivity gains from AI and automation are for all to see: The trade surplus hit a record $1 trillion this year, beating out rival exporting powerhouses like Germany and Japan, with the fastest growth coming from advanced manufacturing, such as cars, integrated circuits and ships.
A deflation payoff
Third, deflation cuts both ways. Investors dislike it because companies have no pricing power. On the flip side, it’s pretty much guaranteed that local brands capable of charging premium prices at home have hit consumers’ soft spot, giving them a fighting chance in global trade as well. The prime example is Guangzhou-based Pop Mart International Group Ltd. The company’s gross profit margin of 70% is more than twice what a generic toymaker can make, thanks to the wickedly cute and viral Labubu.
Going forward, Chinese brands will be increasingly known globally for their design and aesthetic flair. Shoppers will get to appreciate the most silent air conditioners, quiet luxury designer bags, fragrances that rival Le Labo, and even gelatos that taste as good as those in Italy, as my Sicilian calisthenics trainer proclaimed. The so-called “China chic” is coming to wow the world — OK, perhaps anywhere but in the U.S., where Chinese exports tumbled 19% this year. (Thank you for ruining our Christmas, Mr. President!)
The nagging question is how thought leaders in the West got the world’s second-largest economy so wrong. Of course, Beijing doesn’t make it easy — the country didn’t open up from pandemic-related lockdowns until the end of 2022. But some of it, I suspect, is elites’ aversion to visiting an autocracy whose political values are different from their core beliefs. Making money off China isn’t as easy as a decade ago, and some worry that, once there, they might get an exit ban.
But one thing is for sure: It would be a huge mistake writing off China, the only other economic superpower that matters.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
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