China’s tech stocks are experiencing a significant rally, outpacing global markets as the nation pushes forward with technological advancements. This surge comes approximately one year after DeepSeek launched its influential AI model, propelling China towards new tech milestones and a vibrant market performance that appears detached from current economic challenges.
A local Chinese tech stock index, akin to the Nasdaq, has seen an impressive increase of nearly 13% within the current month. Concurrently, a secondary index tracking Chinese tech firms listed in Hong Kong has risen by 6%. Both indices are outperforming the Nasdaq 100. This growth is occurring despite a sluggish economy characterized by ongoing issues in the housing sector and subdued consumer spending.
AI Stocks Soar as Investors Bet on Chinese Innovation
The recent upturn in China's tech sector gained significant momentum in January of the previous year with the release of DeepSeek's cost-effective AI model. This model demonstrated performance comparable to its Western counterparts at a substantially lower price point, a development that sent ripples through global markets and energized China's entire technology landscape.
Following this breakthrough, Chinese technology companies have shown remarkable resilience and innovation. Major players such as Tencent and Alibaba were quick to integrate generative AI capabilities into their operations. Many other companies have followed suit, dedicating resources to developing their own AI solutions, leading to widespread adoption across the industry.
Chinese AI firms are not solely focused on developing chatbots. They are actively embedding large language models into a diverse range of applications, including industrial machinery, advanced tools, and even autonomous vehicles. Demonstrations have showcased robots successfully completing marathons, engaging in simulated boxing matches, and performing intricate folk dances.
Within manufacturing environments, AI is being integrated into precision machine tools and next-generation equipment. This technological advancement is reshaping perceptions of China, moving it beyond its reputation as a low-cost labor hub to a formidable competitor in the global tech arena, particularly in artificial intelligence.
The financial impact of this shift is substantial. Jefferies reports that the market value of 33 Chinese AI stocks under their observation has surged by $732 billion over the past year. Furthermore, Jefferies anticipates continued growth, noting that Chinese AI companies still represent only 6.5% of the market capitalization held by their U.S. counterparts.
The trend of public listings is also accelerating. A number of new AI-related initial public offerings (IPOs) have experienced significant gains, which in turn is encouraging more companies to pursue public market debuts. Among the firms poised to go public are Xpeng's flying-car division, rocket manufacturer LandSpace Technology, and BrainCo, a company being recognized for its potential as a rival to Neuralink.
Tech Valuations Rise as Beijing Addresses Speculative Behavior
The rapid ascent of tech valuations has not been without concern. Certain stocks are now trading at what appear to be excessively high multiples. Cambricon Technologies, an AI chip developer that competes with Nvidia, is currently trading at approximately 120 times its projected forward earnings. Another index focused on Chinese robotics companies is trading at 40 times forward earnings, a valuation higher than that of the Nasdaq 100, which hovers around 25 times forward earnings.
Regulatory bodies are closely monitoring the situation. Beijing has recently implemented tighter regulations on margin financing, signaling concerns about potential speculative excesses. The heightened activity is largely concentrated in the technology sector, and the authorities' message is clear: they aim to prevent the formation of an asset bubble.
Despite these concerns, some investors maintain a positive outlook on China's tech sector. They cite factors such as low labor costs, effective central planning, and substantial government support as reasons to maintain long positions in Chinese technology companies.
Outside of the technology sector, the economic picture remains challenging. Upcoming economic data is expected to confirm a contraction in investment and weak consumer spending, even as export performance remains robust.
Economists surveyed in a Bloomberg poll anticipate that fourth-quarter GDP growth will be 4.5%, which would represent the slowest growth rate since China reopened its economy following the COVID-19 lockdowns.
For the entirety of the year, growth is projected to reach 5%, aligning with Beijing's official target. However, this headline figure may obscure underlying economic realities. When adjusted for inflation, nominal growth could be as low as 4%, a figure significantly impacted by deflationary pressures. This would mark the slowest pace in half a century, excluding the performance in 2020.
Raymond Yeung, an economist at Australia & New Zealand Banking Group, commented last week that the negative GDP deflator indicates that supply is significantly outpacing demand within the economy. He elaborated in a research note that "A negative GDP deflator suggests excess aggregate supply in the economy."