China innovation: Can income investors participate?

The launch of DeepSeek, China’s Chat GPT equivalent, has brought a buzz back to the Chinese market since the start of the year. Stronger economic growth has also helped galvanise investor interest. China remains a hotbed of innovation, leading the world in areas such as robotics, electric vehicles and clean energy, but can income investors in Asia participate?

Historically, it has been difficult for income investors to invest in China and in its most innovative companies in particular. When the Chinese economy was growing at a pace of 8%+ a year, companies prioritised reinvestment in growth opportunities over returning cash to shareholders via dividends. This was particularly true for its technology sector. Equally, with a substantial presence of quasi-state-run enterprises (known as state-owned enterprises or SOEs), quality – a key priority for Aberdeen Asian Income Fund – was weak.

This has been changing. As the Chinese economy has matured, it has become harder for companies to find these incremental opportunities for growth. With economic growth now settling at a long-term rate of 5%, companies are shifting their priorities, striking a better balance between growing their profits and returning profits to shareholders. This has been supported by government initiatives on corporate governance, which has encouraged higher payouts.

Many companies have started to pay higher dividends, opening up opportunities for income funds such as ours. LSEG data showed total cash dividends from the country’s 2,000 large and mid-cap firms rose to a record high of 3.4 trillion yuan ($468.84 billion) in 2023. This rose by 1.2% in 2024 and could rise a further 8.6% in 2025. Dividends have become a larger part of shareholder returns as a result. These initiatives have also helped improve the overall quality of Chinese companies.

Technology payouts

From our perspective, the most important development has been the step up in dividend payments from China’s internet heavyweights such as Alibaba and Tencent. While we do hold some of the higher quality SOEs, such as those that are part of China Resources Group or China Merchants Group, there is always a risk that companies with significant government ownership are run more for a government agenda than for international shareholders.

Tencent and Alibaba have both helped drive innovation in China’s internet sector. As with the ‘Magnificent Seven’ technology giants in the US, these companies are at the heart of the artificial intelligence revolution. Alibaba, for example, is developing its own in-house chips, has a proprietary large language model Qwen, alongside AI-powered applications such as Quark super assistant. AI also plays a role in its ecommerce platforms, Taobao and Tmall. Tencent has just announced that it will open its artificial intelligence capabilities to external users through Tencent Cloud.

The potential for AI is every bit as exciting in China as it is elsewhere. The launch of DeepSeek at the start of this year surprised global competitors with its strength and sophistication. The Chinese government has outlined its ambition to become a global leader in AI by 2030, and Morgan Stanley forecasts suggest it could be a $1.4 trillion market. As it stands, Alibaba and Tencent are among the leading beneficiaries of this growth and a vital part of its development.

We believe these two companies are a better way to play the development of AI in China than the country’s semiconductor companies. The government has thrown significant resources at the semiconductor sector and, like other strategically important sectors such as solar or electric vehicles, it is possible that growth comes at the expense of profitability.

Tencent has always paid a dividend but has recently lifted its payout to 20%. We believe there is scope for it to be lifted even higher. Alibaba had never paid a dividend until recently but made its first payout of $2.5bn in 2023. It also has sufficient cash generation to pay a higher dividend in future.

Accelerating payouts

The past two decades have seen a revolution in corporate governance across Asia and dividend payouts have been an important part of that change. Indonesia, Taiwan and Thailand now have a strong and well-established dividend cultures, while some markets that have always paid high dividends, such as Singapore, continue to expand the level of payouts.

In spite of the recent increases, China is one of three Asian countries where dividends still look low, alongside India and Korea. Companies in these three markets pay out less than in the rest of the region. With India, economic growth is still high, so lower dividend payouts may be appropriate. However, for China and Korea, we believe there is scope to pay more dividends.

Korea has taken a leaf out of Japan’s corporate governance playbook. Its ‘Value-Up’ scheme aims to address Korea’s persistent discount to other Asian markets by improving corporate governance, enhancing shareholder returns, and promoting transparency through voluntary disclosure and incentives for companies. Higher dividend payouts have been part of this. The changes made by companies under the scheme have allowed us to increase our weighting there, thorough companies such as Samsung Electronics and Samsung Fire and Marine. We are still underweight but have closed the gap.

The overall income yield of the Chinese market, at 2.4%, is still relatively low. We believe companies have the firepower to pay higher dividends and that may bring more of China’s innovative companies in scope for Aberdeen Asian Income Fund. In this way, the opportunity set for the fund continues to expand all the time. It is an exciting moment to be a dividend investor in Asia.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. 

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