Chinese artificial intelligence startup DeepSeek is fueling an unprecedented rally in China’s technology sector, with Hong Kong’s Hang Seng Tech Index surging approximately 25% year-to-date, significantly outpacing the broader Hang Seng Index’s 13% gain. This remarkable performance is prompting analysts to reassess the sustainability of Chinese tech stocks, particularly in light of the country’s ongoing economic challenges.
In a Monday research note, Goldman Sachs analysts suggested this rally may have more durability than previous market surges, including the short-lived September stimulus-driven rally that fizzled within weeks. The key differentiator is DeepSeek R-1, the company’s newest flagship AI model, which has been recognized as globally competitive and cost-effective. According to Goldman Sachs, this breakthrough has fundamentally “altered the narrative” surrounding Chinese technology companies.
The analysts emphasized that while Beijing’s September policy pivot reduced downside risks for stocks, recent technology breakthroughs are more valuable for valuations and earnings because they are “micro- and innovation-driven in nature” rather than purely policy-dependent. This distinction could provide the current recovery with significantly more staying power.
The rally represents a dramatic reversal for Chinese tech firms, which spent recent years under pressure from Beijing’s regulatory crackdown on Big Tech. Now, major players are posting substantial gains in succession. Last week saw strong performances from Alibaba and Baidu, while gaming giant Tencent experienced its moment on Monday, with shares initially jumping nearly 8% to their highest level since 2021 before closing 4% higher. The surge followed Tencent’s confirmation that it was integrating DeepSeek’s AI model into its Weixin super app.
Goldman Sachs identified three primary AI-driven areas where Chinese companies could see earnings boosts: productivity gains, cost savings, and new revenue opportunities. The analysts also noted that a confidence boost could raise the fair value of Chinese shares by 15% to 20%, potentially attracting $200 billion in net buying for Chinese stocks.
However, the analysts cautioned about significant risks, including data privacy concerns, industry regulation, intensifying Western export controls, and China’s broader economic challenges. They emphasized that “forceful policy delivery, notably fiscal stimulus, is necessary to soften the immediate tariff headwinds,” while highlighting ongoing challenges such as boosting domestic demand and overcoming the disinflationary spiral.
Key Quotes
DeepSeek R-1 — the AI company’s newest flagship model, which is seen as globally competitive and cost-effective — has ‘altered the narrative’ of China tech
Goldman Sachs analysts made this assessment in their Monday research note, highlighting how DeepSeek’s breakthrough AI model has fundamentally changed investor perception of Chinese technology companies and their competitive position in the global AI race.
might give the recovery more staying power than those that were purely driven by policy news and expectation repricing
Goldman Sachs analysts explained why this AI-driven rally differs from the September stimulus surge, emphasizing that innovation-driven growth is more sustainable than policy-dependent market movements, suggesting longer-term value creation potential.
As promising and strategically important as AI could be to China’s long-term growth outlook, we’d emphasize that forceful policy delivery, notably fiscal stimulus, is necessary to soften the immediate tariff headwinds
Goldman Sachs analysts provided this cautionary note, acknowledging that while AI innovation is transformative, China still faces significant macroeconomic challenges that require government intervention to ensure sustainable growth beyond the technology sector.
Our Take
DeepSeek’s emergence represents a pivotal moment in the global AI competition, demonstrating that innovation can emerge from unexpected sources despite geopolitical tensions and export restrictions. The cost-effectiveness of DeepSeek’s model is particularly noteworthy—it challenges the assumption that competitive AI requires massive capital expenditure, potentially democratizing access to advanced AI capabilities.
The rapid integration into Tencent’s ecosystem shows China’s structural advantage: massive platforms with billions of users can quickly deploy and monetize AI innovations at scale. However, Goldman Sachs’s cautious optimism is warranted. The sustainability of this rally hinges on whether AI-driven productivity gains can offset China’s broader economic challenges, including weak consumer demand and deflationary pressures. The geopolitical dimension—particularly Western export controls—remains a wildcard that could either spur further Chinese innovation through necessity or constrain development through restricted access to critical components. This rally may be different, but it’s not without significant headwinds.
Why This Matters
This development marks a potential turning point for China’s technology sector and the global AI landscape. DeepSeek’s emergence as a cost-effective, globally competitive AI model challenges the narrative that cutting-edge AI development is exclusively dominated by Western companies like OpenAI, Google, and Anthropic. The fact that a Chinese startup can produce competitive AI technology at lower costs has significant implications for the democratization of AI and global technology competition.
For investors and businesses, this signals that Chinese tech stocks may be entering a fundamentally different phase—one driven by genuine innovation rather than policy speculation. The potential for $200 billion in net buying and 15-20% valuation increases represents substantial market movement that could reshape global investment flows.
Moreover, the integration of DeepSeek’s technology into platforms like Tencent’s Weixin, which serves over a billion users, demonstrates how quickly AI innovations can scale in China’s massive domestic market. This could accelerate AI adoption across various sectors, from consumer applications to enterprise solutions, potentially giving Chinese companies a competitive advantage in AI implementation speed and scale. However, the ongoing risks from Western export controls and economic headwinds suggest this rally’s sustainability will depend on both continued innovation and supportive policy measures.
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