The Great Chinese Technorally: What risks investors need to be aware of

Advances in the development of artificial intelligence and the production of proprietary chips for it have triggered a large-scale rally in the market of technology companies in China. But you should approach investments in the Chinese market with caution, experts warn: you never know where the wind from Beijing will blow.

Hong Kong's Hang Seng Tech Index rose nearly 8.5% in September alone, increasing the capitalization of its 30 companies by $240 billion, Bloomberg writes.

China's stock market has seen good gains since April, after US President Donald Trump took a step back in the trade war he launched and began talks with Beijing.

But growth has accelerated recently, so much so that it has even become a concern for the Chinese authorities - they do not want a repeat of the bubble inflations of 2007 and 2015. The new jump has sparked optimism about the achievements of local AI companies.

A strong trigger was Alibaba's quarterly results. In late August, the company reported that revenue in its cloud division grew 26% (analysts expected 18.4%). Triple-digit growth in sales of AI-related products was key to the expansion of the cloud business. While large-scale monetization of AI is still a dream for companies around the world, Alibaba's stock jumped 19% in Hong Kong on September 1 and its capitalization rose $50 billion.

Reports from other tech companies, including Baidu, Cambricon and Huawei, have shown that Chinese manufacturers have made impressive strides in developing advanced chips and AI products themselves - at least for the domestic market. All Internet majors are looking to develop their AI models quickly - from Tencent with Hunyuan to Baidu with Ernie, Bloomberg notes.

Baidu shares jumped nearly 16% in Hong Kong on Sept. 17. Goldman Sachs analysts said the quality of the latest Ernie X1.1 AI model outperformed DeepSeek. It was the release earlier this year of a model from startup DeepSeek, comparable in quality to ChatGPT but less expensive, that triggered increased interest in Chinese technological developments.

Huawei on September 18 unveiled its strategy to compete with Nvidia for the first time. The company will unveil two modifications of its flagship Ascend 950 AI chip by the end of this year, before releasing a 960 version in 2027 and a 970 version in 2028, according to vice chairman Eric Xi. The Ascend 950 chip will utilize its own high-performance memory, he said. This will overcome a key technological limitation that has made China's semiconductor industry dependent on suppliers from South Korea and the United States for years.

Huawei also plans to release new Atlas 950 and Atlas 960 computing super nodes (clusters), which will be the most powerful in the world, Xi said. The Atlas 950 SuperPod will have nearly 15,500 chips, and its combined power will be 6.7 times that of Nvidia's new NVL144 system.

"Chinese tech leaders are noticeably accelerating their investments in AI and new product launches - models, robotaxis, chips of their own making - while proving they can monetize AI faster than many expected," says Charu Chanana, chief investment strategist at Saxo Markets. - As [Chinese bigtech stocks'] valuation ratios lag behind their U.S. counterparts, investors are starting to take notice again."

The total capital expenditures of Chinese technology leaders such as Alibaba, Tencent, Baidu and JD.com will grow to $32 billion this year from $13 billion in 2023, Bloomberg estimates . It is, however, an order of magnitude less than the planned investments in AI by leading U.S. corporations - Meta, Microsoft, Amazon, Alphabet, Oracle and Apple. They will exceed $390 billion this year (more than twice as much as in 2023).

Chinese stocks look attractive because they are noticeably cheaper. The capitalization to projected earnings (P/E) ratio of companies in the Hang Seng Tech Index is now 21 - lower than the average over the past five years (23.3) and than the U.S. Nasdaq 100 Index (27).

According to Jason Chan, senior investment strategist at Bank of East Asia in Hong Kong, the rally in the Chinese market is being led mainly by companies in AI-related sectors, especially in computing infrastructure. "Market sentiment in this area is quite strong," he believes.

Shares of Cambricon, dubbed "little Nvidia" in China, more than doubled in August. The company, which competes with Huawei in AI gas pedals, reported a record profit of 1.03 billion yuan ($144 million) in the first half of the year, compared with a loss of 533 million yuan ($75 million) a year earlier. Until August, Cambricon's quotes were changing weakly. However, after 2024, its shares became the best in the Chinese market, rising in price by 383%.

Shares of semiconductor manufacturers were "warmed up" by investors especially strongly. Thanks to this, the securities of Semiconductor Manufacturing International Corp. and Hua Hong Semiconductor approximately doubled in price during three months of uninterrupted growth.

As a result, the P/E of the Star50 index of mainland-traded semiconductor companies rose to 57 versus a five-year average of 41.

It will take years for China's chip market to become independent from the U.S., but the process "will create excellent investment opportunities," Jian Shi Cortesi, a fund manager at GAM Investment Management, told Bloomberg. "I wouldn't chase current quotes but wait for opportunities to buy at more attractive levels," he added.

The jump in quotes reflects investor expectations that more semiconductor products will be manufactured in China itself, said Bush Chu, investment manager at Aberdeen Investments. Both U.S. and Chinese authorities' restrictions are contributing to that.

The U.S., for example, has restricted shipments to China of products from Nvidia and Taiwan's TSMC, the largest contract chip maker.

Beijing, in turn, in August restricted purchases of the H20 chip, which Nvidia, in coordination with the U.S. authorities, produces specifically for China. And in September - banned local companies, including ByteDance and Alibaba, to order RTX Pro 6000D chips, which Nvidia specifically makes for the Chinese market, reported the Financial Times with reference to three sources. According to them, the regulators concluded that the domestic chips are comparable in performance to those American models used in China.

Chinese chips are still inferior to Nvidia and AMD products, but the companies have begun to find innovative solutions to get around power and performance limitations, Bloomberg writes.

Such a decision, in particular, was Huawei's announcement to combine chips into powerful clusters. "Huawei has unveiled an ambitious roadmap for AI chip development," said Charlie Dai, principal analyst at Forrester Research. - While Huawei acknowledges that its chip lags behind Nvidia in performance, it will make up for it with large-scale clustering, proprietary communication protocols and cost advantages."

Investors in the Chinese market should always be wary, cautions Jon Treacy, publisher of investment newsletter Fuller Treacy Money: "This is not a market where you can buy and forget. Political volatility is real. It can work for or against investors. Right now, the political winds are blowing against them as China tries to gain a competitive advantage in AI."

But not so long ago, the opposite was true, Tricey reminds us. Alibaba's share price has doubled since the beginning of this year, soaring from 80 yuan to just over 160 yuan, but is still half as high as it was at its peak in late 2020, when it reached 320 yuan.

Then founder Jack Ma, who learned a lot from Western tech companies, "forgot what it means to run a company in China," writes Treacy: "His public criticism of banking regulators in 2020 led to a clear demonstration of who's in charge in China."

In the months that followed, authorities canceled the IPO of Alibaba's financial unit, Ant Group, and forced Ma to divest most of his stake. The entrepreneur simply disappeared from the public eye.

Beijing, on the other hand, organized a major offensive against the technology sector and popular big businessmen. In particular, it completely destroyed the huge online education (ed-tech) sector, and Ma was lucky to stay out of jail.

Beijing's actions have dealt a giant blow to entrepreneurial freedom, effectively killing the venture capital sector and delaying technological development for years, despite its declared priority. It also led to "the largest destruction of wealth in modern Chinese history," Bloomberg writes: Alibaba alone lost almost $700 billion in market capitalization (about 88%).

But this year, Ma started showing up at the company's headquarters again and participating in employee conferences, Bloomberg says. At one in April, Ma spoke about the critical role Alibaba's cloud platform, its proprietary T-head chips and Qwen family of AI models, which he said he receives daily reports on.

"Technology is not just about conquering the stars and oceans. It is about keeping the spark alive in each of us," Ma said.

After the event, some employees said they felt encouraged and inspired, as if they were observing the startup's culture on its first day of operation.

Notably, Ma is now back in a public role at the company, marking an important reversal in Alibaba's focus on the AI market and intensifying its fight against online shopping rivals, including JD.com and Meituan, writes Treacy.

"But more importantly, the return suggests that his exile, initiated by the Communist Party, is over. He has apparently received approval from the most senior figures in the government to lead Alibaba's efforts to achieve leadership in the fast-growing AI sector," summarizes Treacy.

In February, Alibaba pledged to spend more than 380 billion yuan ($53.4 billion) over three years on AI and cloud infrastructure.

It has invested more than 100 billion yuan ($14 billion) in AI infrastructure, research and development of AI products over the past four quarters, its CEO Eddie Wu said in August(quoted by Reuters), "Our investments in AI have started to deliver tangible results. We see an increasingly clear path for AI to drive strong growth for Alibaba."

This article was AI-translated and verified by a human editor