China’s growing influence in the artificial intelligence (AI) sector is driving a surge in optimism toward the country’s tech stocks, with key indexes approaching a technical bull market. The Hang Seng Tech Index rose by as much as 2.9% on Friday, marking a more than 20% increase from its January low. Major players such as Xiaomi Corp. and Alibaba Group Holding Ltd., which hold significant weight on the index, each saw their stock prices climb nearly 30% over the same period. These companies are seen as key beneficiaries of AI’s rapid advancement.
The spotlight is also on Chinese startup DeepSeek, whose newly launched AI model is being heralded as a potential game-changer for the tech industry. The model underscores China’s growing technological capabilities and has sparked renewed investor interest in the country’s tech sector, which has struggled in recent years amid trade tensions, particularly with the U.S. during Donald Trump’s presidency.
Sat Duhra, a portfolio manager at Janus Henderson Investors in Singapore, emphasized the shift in sentiment: “This is a sector that has been ignored but like other purely domestic sectors, there are some bright spots. The recent DeepSeek announcement is a timely reminder that behind the scenes, industrial policy — for example Made in China 2025 — has pushed many sectors toward world-class status.”
Alibaba’s shares have also benefited from the company’s claim that its new AI model outperforms Meta Platforms’ Llama and DeepSeek’s V3 in various benchmarks, further fueling investor optimism.
Brokers on Wall Street are optimistic about the prospects of Chinese tech stocks, with many analysts predicting that the “Chinese discount” in valuations will soon fade. Investors are increasingly bullish on the strength of China’s manufacturing sector and technological prowess. DeepSeek, in particular, has garnered attention for developing an AI app at a fraction of the cost spent by U.S. rivals, despite the ongoing chip export restrictions imposed on China.
Peter Milliken, an analyst at Deutsche Bank, believes 2025 will be the year when global investors recognize China’s competitive edge. “We think 2025 is the year the investing world realizes China is outcompeting the rest of the world,” Milliken wrote in a February 5 report titled “China Eats The World,” which went viral on Chinese social media and was widely celebrated by the local investment community. Milliken added, “Investors will have to pivot sharply to China in the medium term, and will struggle to get access to its stocks without bidding them up.”
Deutsche Bank’s upbeat outlook comes as foreign funds show increasing interest in China’s tech sector. HSBC, in a recent note, predicted that the valuation gap between China and other emerging markets may narrow as foreign inflows increase. Steven Sun, head of research at HSBC Qianhai Securities, noted that A-share tech companies could benefit from ongoing policy support. However, he cautioned that China’s innovation must be translated into higher profitability, a challenge that can only be addressed through demand-side stimulus.
Despite the rising optimism, the situation remains complicated. Chinese equities have faced significant challenges in recent years, including a slowdown in the property sector and underwhelming economic data. The imposition of a 10% tariff on Chinese goods by Washington has also weighed on investor sentiment.
Onshore investors have shown renewed confidence, with Southbound capital flows into Hong Kong’s tech shares increasing in January, a trend that could continue given the AI sector’s growth potential, according to Bloomberg Intelligence strategist Marvin Chen.
Valuations for Chinese tech stocks remain favorable, with the Hang Seng Tech Index trading at 17 times forward earnings, compared to 27 times for the Nasdaq 100 Index, reinforcing the bullish outlook. However, Morgan Stanley analysts maintained a cautious stance on Chinese semiconductors and hardware stocks, citing ongoing risks, including the potential expansion of U.S. chip export restrictions.
While the Hang Seng Tech Index is still more than 50% below its early 2021 peak, the recent rally signals a possible turning point for China’s tech sector. Despite a probable outflow of $2.4 billion from Chinese stocks in January, according to Morgan Stanley, the pace of foreign fund withdrawals is slowing, suggesting a shift in market sentiment.
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