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Global Geopolitical Tensions and Tech Race Fuel Investment in China’s Defense Sector
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Assessing China’s Defense Sector Amid Geopolitical Strains
Geopolitical issues, such as rising tensions between India and Pakistan and the U.S.-China trade conflict, have led to a re-evaluation of China’s defense sector. Analysts shed light on how these geopolitical developments impact China’s military-industrial complex, identify eight key technological trends driving the defense industry, and examine potential investment opportunities. This report also predicts investment flows within China's A-share defense sector post-Q2 2023.
8 Key Technological Trends and Investment Prospects in China’s Defense Industry
Wang Hongtao, an analyst at Zhonghang Securities, attributes the U.S.-China tariff conflict and rising defense budgets to technological rivalry. In this context, he highlights eight technological trends that could open up investment opportunities in the defense sector.
1. Military Automation and Smart Technologies
Adoption of automation and smart technologies on the battlefield has been on the rise. The use of drones in the Russia-Ukraine conflict exemplifies this. Future advancements in autonomous controls and artificial intelligence are set to be integrated into military systems, transforming defense tactics. Wang forecasts that these technologies will become pivotal in China’s defense transformation initiatives.
2. Development of Next-Generation Strategic Weapons
Escalating global trade tensions are intensifying technological competition in the military sector. While the U.S. focuses its defense budget on nuclear deterrence, China has been accelerating the development of next-generation weapon systems since 2024. During the 15th Five-Year Plan (2026–2030), these innovations are expected to reach mass production, generating new investment opportunities.
3. Accelerated Application of Deep-Sea Military Technologies
China’s latest government work report highlights deep-sea technologies as a strategic growth sector, alongside commercial aerospace and the “low-altitude economy” (propelled by autonomous aerial vehicles). The country aims to enhance its ability to monitor and secure deep-sea regions crucial for trade and maritime resource security. Rapid development of deep-sea equipment and surveillance systems is anticipated.
4. Gains Amid Tariff Risks: 3D Printing and Advanced Materials
U.S. tariffs may lead to growth in China’s emerging markets for 3D printing and recycled materials. To mitigate tariff-induced costs in upstream military resources, industries are turning to lightweight materials like polyether ether ketone (PEEK) and other advanced composites. Wang sees potential in military-grade material supply chains amid this transformation.
5. Localization of Military Information Technology
The drive for self-sufficiency in advanced military electronics and integrated circuits is intensifying, presenting growth opportunities for IT localization industries. As tariff disputes highlight military electronics and computing fields, China is prioritizing technological independence in semiconductor manufacturing. Notably, the U.S.-China trade split has spurred significant growth in China’s domestic IT sectors, with further advancements anticipated as tensions persist.
6. Intensified Competition in Commercial Space Industries
Tariff wars are spurring heightened competition in the commercial space sector. Western companies like SpaceX’s Starlink and the U.K.’s OneWeb are advancing low-orbit satellite services. In response, China is accelerating satellite deployment and cross-sector applications with stronger governmental support, potentially boosting related industries.
7. Accelerated Localization of Large Aircraft Technologies
U.S.-China tariff tensions have reduced the cost-effectiveness of Boeing’s aircraft for Chinese buyers, while Airbus faces potential indirect impacts. As China hastens localization efforts, domestic firms with technological expertise are expected to seize new growth opportunities. For instance, the C919, China’s first domestically-produced commercial jet, achieved a 60% local component rate in 2023. Tariff risks driven by the U.S. are likely to further promote self-reliance, benefiting key domestic manufacturers.
Data from the Stockholm International Peace Research Institute (SIPRI) highlights export growth across several Chinese defense sectors: naval vessel exports increased by 88.23% between 2010–2014 and 2020–2024, air defense systems by 49.86%, and missiles by 34.60%. However, exports of sensors and armored vehicles declined by 66.38% and 19.35%, respectively.
8. Dual-Use Industries: Military and Civilian Applications
Emerging fields such as low-altitude economic technologies and robotics are gaining traction in the defense sector. These dual-use industries blend civilian and military applications, creating versatile investment opportunities.
Investment Outlook for China’s Defense Sector
Based on these eight technological trends, future investment opportunities in China’s defense industry are likely to focus on three main areas:
- Disruptive innovations in unmanned equipment, military smart tools, satellite networks, and electronic countermeasure (ECM) systems.
- Dual-use applications involving low-altitude economies, civilian aviation, commercial space endeavors, deep-sea exploration, military trade, and cybersecurity.
- Industry mergers and acquisitions alongside governmental supervision on market capitalization.
While investors in China’s A-share defense sector could benefit from emerging opportunities, market participants are advised to proceed with caution and conduct thorough analyses.
Disclaimer: This article is for informational purposes only and does not constitute investment advice or an inducement to trade securities. Responsibility for investment decisions based on this information lies solely with the user.
