Finance
China’s quickly gaining an edge over the U.S. in biotech
Two graduate students research chemical products in a laboratory in Xiwangzhuang Town, Zaozhuang City, Shandong province of China, on Dec. 26, 2023.
Nurphoto | Nurphoto | Getty Images
BEIJING — For all the attention on U.S.-China competition in artificial intelligence, new studies point to China’s rapid rise in biotechnology, especially for drug and agricultural development.
Out of five critical tech sectors, “China has the most immediate opportunity to overtake the United States in biotechnology,” the Harvard Belfer Center for Science and International Affairs said Thursday in its release of a “Critical and Emerging Technologies Index,” covering AI, biotech, semiconductors, space and quantum.
While the U.S. is still the leader in all five, “the narrow U.S.-China gap [in biotech] suggests that future developments could quickly shift the global balance of power,” the report said.
The assessment echoes growing concerns in Washington. In fact, the U.S. National Security Commission on Emerging Biotechnology struck a more urgent tone in an April report, citing two years of research.
“There will be a ChatGPT moment for biotechnology, and if China gets there first, no matter how fast we run, we will never catch up,” the bipartisan Congressional commission said in the report, referring to the transformative chatbot released by U.S.-based OpenAI.
“Our window to act is closing. We need a two-track strategy: make America innovate faster, and slow China down,” the commission said. It recommends that the U.S. government spend at least $15 billion over the next five years to support the domestic biotech sector.
China’s biotech industry has evolved to the point that U.S. and European pharmaceutical giants in the last several months have spent billions to acquire China-developed drugs that could treat cancer if commercialized with regulatory approval. In March, British pharmaceutical giant AstraZeneca announced it will invest $2.5 billion in a research and development center in Beijing.
The Harvard Belfer Center pointed out that China’s biotech strengths stem from its “dominance in pharmaceutical production and manufacturing,” in addition to having more human talent than the U.S.
China also has a “more flexible regulatory regime and the ability to push things out faster,” Cynthia Y. Tong, one of the Harvard report’s authors, told CNBC in an interview Thursday. She noted that the U.S. tends to have a longer approval process, as well as more drawn out research and development period.
And just as China is developing its biotech sector, reports from the U.S. biotech hub of Cambridge and Boston are revealing layoffs and empty labs.
A big strategy
China has long used multi-year plans and preferential state policies to encourage the development of key technologies. Biotech is no different, gaining high-level support back in 2007.
“Currently, the U.S. government has no cohesive, intentional biotechnology strategy, while China is gaining ground thanks to its aggressive and carefully coordinated state-led initiatives,” the U.S. security commission said.
The worry is that just as Chinese restrictions on rare earths start to hit car manufacturers, Chinese dominance in biotech could become yet another form of leverage for Beijing over the U.S. and other countries.
“The likelihood there’s going to be cooperation [between the] U.S. and China on anything is very low, in some ways least likely on biotech and AI” because of the congressional report, said Eric Rosenbach, director of the defense, emerging technology, and strategy program at Harvard’s Belfer Center. He was chief of staff at the U.S. Department of Defense from 2015 to 2017.
He expects more U.S. pressure on China.
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It remains to be seen what that would mean in practice for businesses — though some say the future of biotech development is inherently global.
Insilico Medicine, a startup using AI to cut drug discovery costs, relies on a global team spread across China, North America and the Middle East, according to its founder and CEO Alex Zhavoronkov. On Tuesday, the company announced with a paper in Nature Medicine that it was the first to see successful clinical testing with an AI-discovered drug.
While Insilico’s AI work typically happens in Canada and Abu Dhabi, the chemical testing and experiments are done in China, Zhavoronkov said, adding that the head of clinical development is in Boston. He declined to comment on a commercialization timeline in light of conversations with regulators.
Other data shows that China has surpassed the U.S. in the number of clinical trials conducted, seen significant patent growth and boasts the most life sciences construction activity in the world.
China-based Capital O venture partner Yang Fan, who previously worked in the pharmaceutical industry, said he expects the best biotech companies of the future will navigate different countries’ regulations and use resources across the globe, if not benefit from arbitrage opportunities given different requirements and cost of entry in various markets.
“The Chinese market is like a big supermarket for anything that can be commoditized, AI or biotechnology,” he said, adding that new startups in China have to be “really good” to stand out. As AI drives innovation costs down, Fan predicts that in biotech, “the real DeepSeek moment is probably going to happen in five years.”
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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