China's AI Boom Fuels Tech Stock Rally

The emergence of DeepSeek, a Chinese AI startup, has sparked a frenzy among investors, revitalizing interest in China's technology sector, reports Nikkei Asia. The AI model's success has overshadowed concerns over weak domestic demand and US tariffs, propelling Hong Kong's Hang Seng Index to its best performance among major Asian markets this year.

Since the Lunar New Year holiday, companies across China have rushed to announce partnerships with DeepSeek, often resulting in significant stock price increases. This trend has led to substantial gains for major tech companies listed in Hong Kong, including Alibaba (up over 38%), Xiaomi (up nearly 28%), and Kingsoft (up nearly 29%).

"China AI theme is likely to be an outperformer, as investors become more optimistic that DeepSeek’s success could accelerate AI adoption," wrote Richard Tang, head of research for Hong Kong at private bank Julius Baer, in a note on February 11. He added that China's internet giants could be major beneficiaries.

The rally was triggered by the release of DeepSeek's new generative AI model last month, which claimed to achieve state-of-the-art performance at a fraction of the cost of its US counterparts. This stands in contrast to other markets, such as Taiwan and the US, where concerns over the effectiveness of large-scale hardware investments in AI initially led to a selloff of tech stocks.

The rush to partner with DeepSeek has been widespread, with at least 20 Chinese companies, ranging from telecommunication operators to major tech firms and automakers, announcing integrations of the technology. Most of these companies experienced stock price increases following the announcements.

However, despite the excitement, some analysts remain cautious. "Fundamentally AI contributes a limited proportion of most companies' revenue and we think the fierce competition could limit earnings upside in the near term," said James Wang, head of China strategy at UBS, to Nikkei Asia. "That said, technology-fueled rallies typically saw share prices rise ahead of earnings and this year, with ample liquidity and lower interest rates, we see valuation re-rating opportunities ahead for AI-related names."

While DeepSeek's success has sparked excitement, it has also generated controversy, with questions raised about the true cost of training its models and concerns regarding data collection. Some countries have banned the use of DeepSeek's systems on government devices, and some US lawmakers have proposed a ban on the company. The significantly lower price for third parties to use DeepSeek's models compared to its US competitors further intensifies price competition within the Chinese AI market.

Despite these challenges, the frenzy surrounding DeepSeek has provided a much-needed catalyst for China's stock market, particularly for the technology sector. BNP Paribas, while cautious about China's overall economy, remains optimistic about Chinese stocks given the recent developments.

"For our clients, the interest is more on the tech side," said Grace Tam, chief investment advisor for BNP Paribas Wealth Management, when discussing recent client inquiries on China stocks. Investors are drawn to the innovative capabilities demonstrated by DeepSeek and its partnerships.

The strong appetite for tech stocks among Chinese investors is highlighted by the substantial inflows from mainland China into Hong Kong via Stock Connect, which links Hong Kong's stock exchange with the Shanghai and Shenzhen exchanges. Following a record monthly net inflow of HK$125.6 billion ($16.12 billion) in January, another HK$29 billion has been added so far this month.