Chinese technology stocks are experiencing a dramatic resurgence, with Hong Kong’s Hang Seng Tech Index closing 5.6% higher on Friday and gaining an impressive 24% year-to-date. This remarkable rally is largely attributed to the emergence of DeepSeek, a Chinese AI startup that released a cost-competitive AI model last month, challenging the dominance of Western AI companies and reshaping investor sentiment across global markets.
The broader Hong Kong benchmark Hang Seng Index, which includes tech giants like Tencent Holdings and Alibaba Group Holding, closed 3.7% higher and has gained 13% since the start of the year, making it the top performer among major Asian equity benchmarks. Goldman Sachs analysts noted that the launch of DeepSeek R1 and other Chinese AI models has demonstrated Chinese tech companies’ ability to develop globally competitive AI solutions.
Alibaba has been a primary beneficiary of this trend, with its Hong Kong-listed shares closing 6.3% higher and New York-listed shares up 41% year-to-date at $119.54. This represents a dramatic turnaround for the e-commerce giant, which had suffered years of stock declines following Beijing’s crackdown on cofounder Jack Ma’s tech empire. Other major winners include gaming giant Tencent, search engine Baidu, consumer electronics firm Xiaomi, and electric vehicle maker BYD, all posting double-digit percentage gains this year.
The affordable Chinese AI models have sparked significant concerns among Western investors about the massive AI infrastructure investments in the United States and Europe. DeepSeek’s emergence supports the narrative of China’s evolving self-reliance and innovation in technology amid ongoing geopolitical tensions with the US. AI-related stocks on Wall Street experienced a sell-off last month due to fears of Chinese competition, but Chinese tech shares have been rallying since markets reopened after the Lunar New Year holidays.
According to Steven Sun, head of research at HSBC Qianhai Securities, trading turnover in the AI value chain now accounts for over 50% of mainland China’s A-share market, despite these stocks representing just 15% of market capitalization. This enthusiasm has raised concerns about potentially stretched valuations in the short term. Chinese stocks received an additional boost after Reuters reported that President Xi Jinping is expected to meet with private sector leaders, including Alibaba’s Jack Ma and Tencent CEO Pony Ma, next week.
However, Goldman Sachs analysts warn of potential risks, noting that intensified US export controls or faltering self-reliance efforts could result in a 2% reduction from current prices in an extreme scenario.
Key Quotes
The recent launch of DeepSeek R1, among other Chinese AI models, has demonstrated Chinese tech companies’ ability to develop globally competitive AI models
Goldman Sachs analysts wrote this in a Wednesday note, highlighting the significance of DeepSeek’s breakthrough in proving that Chinese companies can compete with Western AI leaders despite technological restrictions and export controls.
Trading turnover in the AI value chain now accounts for over 50% of mainland China’s A-share market, even though the stocks account for just 15% of the market’s capitalization
Steven Sun, head of research at HSBC Qianhai Securities, made this observation in a Thursday note, illustrating the extraordinary investor enthusiasm for Chinese AI stocks and potential concerns about overheating in the sector.
In an arguably extreme case where the self-reliance effort falters and/or the US export controls intensify that result in a permanent degradation in trend growth, the earnings and valuation downside could combine to 2% potential reduction from current prices
Goldman Sachs analysts warned about downside risks facing Chinese tech stocks, acknowledging that geopolitical tensions and technology restrictions could still derail the current rally if China’s technological self-sufficiency efforts fail.
Our Take
The DeepSeek phenomenon represents more than just a stock market rally—it’s a wake-up call for the global AI industry. The fact that a Chinese startup achieved competitive AI performance at a fraction of the cost challenges the capital-intensive approach dominating Western AI development. This suggests that innovation and algorithmic efficiency may matter more than raw computing power and massive data centers.
The 50% trading turnover concentration in AI stocks despite representing only 15% of market cap is concerning, indicating potential bubble dynamics. However, the fundamental shift in China’s technological capabilities is real. The upcoming meeting between Xi Jinping and tech leaders like Jack Ma signals potential policy support that could sustain this momentum.
For global investors, this creates a complex calculus: Chinese AI stocks offer exposure to genuine innovation and growth, but geopolitical risks remain substantial. The bifurcation of global AI ecosystems appears inevitable, creating both opportunities and challenges for companies operating across borders.
Why This Matters
This development represents a pivotal moment in the global AI race, demonstrating that China has successfully developed competitive AI technology despite US export restrictions on advanced chips and technology. DeepSeek’s cost-effective AI model challenges the prevailing assumption that building cutting-edge AI requires massive capital investments, potentially disrupting the business models of Western AI giants like OpenAI, Google, and Microsoft.
The rally signals a fundamental shift in investor confidence regarding Chinese tech companies’ innovation capabilities and their ability to compete globally in the AI sector. After years of regulatory crackdowns and economic uncertainty that depressed Chinese tech stocks, this resurgence suggests that China’s tech sector may be entering a new growth phase driven by AI breakthroughs.
For the broader AI industry, this matters because it introduces genuine competition and alternative approaches to AI development. If Chinese companies can achieve comparable results with significantly lower costs, it could force Western companies to reconsider their massive infrastructure investments and potentially democratize access to advanced AI technology. The geopolitical implications are equally significant, as China’s AI advances strengthen its position in the ongoing technological rivalry with the United States and may accelerate the bifurcation of global technology ecosystems.
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