(Bloomberg) -- China’s growing clout in the artificial intelligence space has sparked a wave of optimism toward the nation’s tech shares, with a gauge entering a bull market and brokers issuing upbeat calls.
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The Hang Seng Tech Index climbed 1.8% on Friday to take its gains from a January low to over 20%. Xiaomi Corp. and Alibaba Group Holding Ltd., which have the biggest weighting on the gauge, each rallied almost 30% during that period. Both are viewed as beneficiaries of AI advancement.
Chinese startup DeepSeek’s AI model is being hailed as a game-changer for the tech industry, highlighting the nation’s innovative capabilities. It’s also prompting a broader re-evaluation of the nation’s beaten-down shares, just as the market was caught in the crosshairs of a tariff war following Donald Trump’s return to the White House.
“This is a sector that has been ignored but like other purely domestic sectors, there are some bright spots,” said Sat Duhra, portfolio manager at Janus Henderson Investors in Singapore. “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 been buoyed by the company’s assessment that its new AI model scored better than Meta Platforms’ Llama and DeepSeek’s V3 in various tests.
It’s a rare moment of victory led by the private sector, after the Chinese market has been bogged down for years by government regulations and policy uncertainties. Wall Street brokers are upbeat, arguing that the Chinese discount will vanish as gauges top prior highs due to manufacturing strength and tech competence.
DeepSeek emerged as a formidable challenger to global AI leaders after it unveiled an app developed at a fraction of the cost that rivals spent to build their products, even amid curbs on imports of the most cutting-edge chips to China.
“We think 2025 is the year the investing world realizes China is outcompeting the rest of the world,” Deutsche Bank analyst Peter Milliken wrote in a Feb. 5 report entitled “China Eats The World.” The note went viral on the Chinese internet search engine, with the local investment community applauding the upbeat comments.
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“Investors we believe will have to pivot sharply to China in the medium term, and will struggle to get access to its stocks without bidding them up,” Milliken wrote.
Deutsche Bank Says Investors Will Flood Into Chinese Stocks Soon
HSBC said the valuation gap between China and emerging markets may narrow, as foreign fund inflows pick up amid a growing awareness of the nation’s technological prowess.
“In addition, A-share tech companies may also benefit from policy support,” Steven Sun, head of research at HSBC Qianhai Securities Ltd., wrote in a Feb. 6 note. “The missing link is that innovation in China has yet to be translated into higher profitability, which can only be solved through demand-side stimulus.”
The positive tone stands in contrast to the bearishness that has weighed on Chinese equities in recent years as investors contend with a property-sector slump and lackluster economic data. Washington’s recent decision to slap a 10% tariff on China’s goods had added to the headwinds.
Southbound flows edged higher in January as onshore investors piled into Hong Kong’s tech shares and the trend may persist due to AI tailwinds, Bloomberg Intelligence strategist Marvin Chen wrote in a note.
Favorable valuations have also helped to reinforce the upbeat sentiment. The HSTECH index is trading at 17 times forward earnings estimates, compared with 27 times for the Nasdaq 100 Index, according to data compiled by Bloomberg.
To be sure, Morgan Stanley strategists reiterated their cautious stance on China’s semiconductors and hardware stocks in a note dated Feb. 1, citing broader tariff and other risks. These include the possibility that the US may expand curbs on advanced chip sales to Beijing.
Despite the latest rally, the HSTECH gauge is still more than 50% below a peak reached in early 2021. In addition, Morgan Stanley said foreign funds probably withdrew $2.4 billion from Chinese stocks in January although the pace of decline was likely slower than the previous month’s.
--With assistance from Margo Towie and Jiyeun Lee.
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