J.P. Morgan GEMS FTM 16 Jul 26 China Equity Strategy; Techtronic Industries (0669); China: Growth weakened despite activity stabilization; Aura Minerals; Localiza; CE3 FX Strategy: Steady does it and More

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J.P. Morgan GEMS FTM 16 Jul 26 China Equity Strategy; Techtronic Industries (0669); China: Growth weakened despite activity stabilization; Aura Minerals; Localiza; CE3 FX Strategy: Steady does it and More

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GEMS First To Market 16 July 2026

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China Equity Strategy (Erin Zhang, CFA) China

The AI Theme: Deleveraging as a Healthy Reset

In our onshore marketing conversations over the past week, client discussions have centered on the China AI ecosystem.

Investors broadly agree that the recent pullback has been fueled by deleveraging, but hold diverging views on the longer-term

fundamental outlook, particularly the sustainability of AI capex. We disagree with the bubble-soon-to-burst narrative based on

three fact checks: 1) Balance sheet health. Liability-to-asset ratios of both Chinese and global hyperscalers remain at c40%,

well below the leverage extremes of prior cycle peaks in China real estate (c100%) and US dot-com bubble (c230%) (Figure 1).

2) Capability frontier still advancing. Large language model providers continue to push performance boundaries, with Chinese

models striving to close the gap on US peers too. We see the upside optionality that technological advancement unlocking new

use cases and driving ARR growth (Figure 2). 3) Hardware bottleneck is not going away soon. Critical AI component capacity

constraints are unlikely to be resolved before late 2027–28 at the earliest. The next two quarters are unlikely a validation