As geopolitical tensions between the US and China continue to ebb and flow, investors are once again assessing where the world’s second-largest economy fits within a diversified portfolio. In his latest update for IFA Magazine today, Gabriel Sacks, Co-Manager of Aberdeen Asia Focus plc, argues that while America’s dominance may endure, China’s smaller, domestically focused and increasingly innovative companies could offer compelling – and often overlooked – opportunities for long-term investors to be ‘very productive’.
The leaders of the world’s two most powerful economies chatted by phone a couple of months ago. Afterwards, as is his wont, one of them, the President of the United States, was quick to declare the encounter “very productive”.
It was difficult to know what to make…
As geopolitical tensions between the US and China continue to ebb and flow, investors are once again assessing where the world’s second-largest economy fits within a diversified portfolio. In his latest update for IFA Magazine today, Gabriel Sacks, Co-Manager of Aberdeen Asia Focus plc, argues that while America’s dominance may endure, China’s smaller, domestically focused and increasingly innovative companies could offer compelling – and often overlooked – opportunities for long-term investors to be ‘very productive’.
The leaders of the world’s two most powerful economies chatted by phone a couple of months ago. Afterwards, as is his wont, one of them, the President of the United States, was quick to declare the encounter “very productive”.
It was difficult to know what to make of this claim. Donald Trump uses the term “very productive” with dazzling frequency on his Truth Social page, more often than not in the wake of high-level discussions. Even his conflabs with Vladimir Putin tend to tick the box.
Xi Jinping, the President of China, is rather less prone to enthusiastic public pronouncements. The call reportedly marked the first time he had deigned to speak with Trump in around three months[1], so his conspicuous silence in its aftermath came as no shock.
Fast-forward to mid-October and a full-blown US-China trade war was suddenly back on the agenda, suggesting “very productive” was a bit of an exaggeration after all. Jump to the end of the same month and Trump and Xi were all smiles after a face-to-face meeting.
It is hardly surprising that such fluctuating tensions pique investors’ interest. At the very least, they provide grounds to revisit each country’s investment attractions amid continued geopolitical uncertainty.
The US’s appeal is widely appreciated, of course. American stocks have dominated equity markets for years, with mega-cap technology companies in particular carving out an ever-greater share of global indices.
By and large, this pre-eminence persists. Yet it is generally accepted that the US has suffered a wobble or two in 2025 and could yet suffer another – reminding us that the potential benefits of diversification should never be overlooked.
So can China assist in this regard? I believe it can – but I also believe investors need to look beyond the obvious if they really want to get the most out of what in many ways remains the most fascinating economy on Earth.
Small, domestically focused and innovative
There are numerous popular misconceptions surrounding investing in China. One of the most unhelpful is that only the country’s very biggest companies are worth more than a second glance.
It is first important to acknowledge that some of these businesses *do *warrant attention. For instance, there is much to be said for the likes of Tencent, which ranks among the highest-grossing multimedia conglomerates anywhere, or CATL, the world’s number-one manufacturer of batteries for electric vehicles and energy storage.
But what about smaller companies? With a population of more than 1.4 billion, China boasts a massive domestic market – and it is here that many such businesses are either poised to thrive or already flourishing.
Pent-up demand is key. Although China’s working-age citizens have been reluctant to spend in light of factors including a prolonged real estate crisis, a weak social safety net and the lingering ravages of COVID-19, the government is determined to reinvigorate growth.
If and when it is finally unleashed, the resultant wave of consumption could be huge. By way of illustration, it was estimated last year that the net increase in China’s household bank accounts since the advent of the pandemic equates to almost $10 trillion – more than double Japan’s GDP in 2023[2].
The long-awaited transition from imitator to innovator also merits consideration. This brings us to another misconception – the notion that China will never shake off its long-held reputation as a “fast follower”.
The reality today is that many Chinese companies are at the cutting edge. Others are being encouraged to join them. Beijing no longer appears fiercely opposed to entrepreneurship, and the message from the top is that businesses will be rewarded, not punished, for achieving growth – which is more good news for smaller players.
Finding under-the-radar opportunities
Against this backdrop, specialist investment teams with on-the-ground knowledge can be well placed to discover China’s hidden gems. Such companies may be found in multiple sectors and industries.
Take Precision Tsugami. Best known as a maker of lathes, grinders and other precision tools, it is increasingly fulfilling orders related to robotics and artificial intelligence.
Another of our holdings, Kingdee, produces enterprise resource planning (ERP) software. With Chinese businesses under pressure to avoid using go-to Western ERP suppliers such as SAP, Kingdee is broadening its offering to meet the needs of domestic companies of all sizes.
Atour Lifestyle is another under-the-radar example. As well as rapidly expanding its established hotel operations, it is developing a strong brand in homeware and lifestyle goods retailing.
The vast majority of investors have never heard of these names. Most investment analysts also pay them no heed. And it seems safe to suppose they were not mentioned during Trump and Xi’s pow-wow.
Yet many such opportunities are out there, ready to add to smaller companies’ proven record of outperforming their larger counterparts over the long term. The trick lies in knowing where to look and what to look for.
I am not intimating that the US’s primacy in the sphere of global equities is set to end anytime soon. But I would definitely argue that casting the investment net further afield could be – with all due respect to Truth Social’s most tireless contributor – “very productive”.
[1] See, for example, Al Jazeera: “Trump-Xi call thaws US-China relations, but no clear TikTok deal yet”, September 19 2025 – https://www.aljazeera.com/economy/2025/9/19/trump-xi-call-thaws-us-china-relations-but-no-clear-tiktok-deal-yet.
[2] See, for example, Forbes: “New Trump tariff impact on China likely overestimated – Andy Rothman”, November 8 2024 – https://www.forbes.com/sites/forbeschina/2024/11/08/new-trump-tariff-impact-on-china-likely-overestimated-andy-rothman/.