Chinese Tech Stocks Poised for Continued Growth

In recent days, Chinese A shares have experienced a remarkable rally, continuing for a second consecutive session. This positive trend signals potential for a prolonged uptrend in the market as investors take a fresh look at Chinese stocks. A significant factor contributing to this optimism is the impressive advancements made by the country's artificial intelligence (AI) models, which have taken many market observers by surprise.

The emergence of DeepSeek, a private AI startup in China, has further highlighted the nation’s ability to innovate in the field of AI. Analysts believe this development may lead global investors to recognize China's strengths in numerous areas, suggesting that the A-share market could surpass its previous highs in the medium term.

On Friday, the Shanghai Composite Index rose by 1.01 percent, closing at 3303.67 points. This marks the first time this year that the index has closed above the 3,300 mark, following a robust gain of 1.27 percent the day before. Meanwhile, the ChiNext Index, which tracks China's Nasdaq-style board for growth enterprises, increased by 2.53 percent to end the day at 2174.35 points, continuing its ascent after a 2.8 percent rise on Thursday.

Total market turnover reached a staggering 2 trillion yuan (approximately $274.43 billion) on Friday, which is the highest amount seen in over a month. The success of DeepSeek has fueled growth in various sectors, particularly in smart vehicles, computer hardware, software, and the internet.

David Chao, a global market strategist for Invesco, noted that investors are starting to realize that this relatively unknown Chinese AI company has achieved results comparable to some of the leading AI firms in the United States. He emphasizes that Chinese equities, especially tech companies, are trading at a considerable discount when compared to their U.S. counterparts. As the competitiveness in AI development sharpens, the valuation gap between these companies is expected to diminish.

Chao also indicated that despite U.S. export restrictions on hardware, Chinese technology firms are continuing to innovate, particularly in software. This resilience is reinforced by China's ongoing commitment to enhancing technological innovation. Recently, the China Securities Regulatory Commission has rolled out new guidelines aimed at bolstering high-quality science and technology firms seeking to go public.

These guidelines emphasize the importance of support for strategic industries, including next-generation information technology, AI, aerospace, new energy, advanced materials, high-end equipment, biomedicine, and quantum technology.

Foreign financial institutions share a similarly positive outlook regarding Chinese tech stock valuations. Peter Milliken, the head of Asia-Pacific company research at Deutsche Bank, stated that the technological achievements of China have often been undervalued by investors, but he predicts that this discount will soon be eliminated.

According to Milliken, it is increasingly clear that China excels in a variety of sectors, including manufacturing and services. He expressed confidence that the bull market for both H shares and A shares is set to begin in 2024 and expects the market to reach new highs in the medium term.

The benchmark A-share index previously peaked at 3674.4 points in October, a three-year high, before retreating. Based on the current trends, Yang Delong, chief economist at First Seafront Fund, believes the A-share market is on the verge of a sustained bullish phase that may take many investors by surprise. He points out that as macroeconomic adjustments continue, savings from the property market are likely to shift toward equity investments.

Yang noted, "The market is poised for strong performance once a positive profit-making trend begins. Rising stock prices create a cycle where profits attract more investors. Thus, expecting the SCI to reach around 4,000 points this year is not too ambitious," adding that opportunities exist in humanoid robotics and new energy sectors.

However, it is essential to consider potential risks as well, particularly with the introduction of new U.S. tariffs on Chinese goods that could spark risk aversion and weigh on A shares, as noted in a report by CGS International.

China, Stocks, AI