China’s tech sector is thriving — with a catch. Stocks are at three-year highs, driven by optimism over DeepSeek, the homegrown answer to OpenAI, and strong corporate earnings. But Tuesday’s declines — triggered by Donald Trump’s latest executive order — serve as a stark reminder that geopolitical risk will remain an enduring force in Chinese equity markets.
The rally had been well-founded. Alibaba, a key beneficiary of the artificial intelligence-driven surge, reported strong earnings growth as revenue rose to $39bn in the latest quarter. Earnings at local peers Lenovo and Xiaomi also beat expectations, driving gains in the Hang Seng Tech index. As across the Pacific, high hopes for AI have driven valuations upwards.
That has prompted growing investments. Alibaba has pledged an aggressive $53bn outlay on cloud computing and AI infrastructure over the next three years. Peer Huawei has made progress in AI chip production. Even as the US tightens restrictions on semiconductor exports, Beijing is strengthening self-sufficiency initiatives that make its tech sector resilient to external pressures.
The back and forth continues. Alibaba had gained 70 per cent this year, until a Trump decree aiming to curb Chinese investment in critical US industries knocked 10 per cent off the company’s American depositary receipts. That made Tuesday the stock’s worst single day since October 2022. Trump’s team is also weighing even tougher chip export restrictions than those currently in place, signalling a potential escalation in trade tensions.
None of this should come as a surprise. During Trump’s first term, the Chinese tech rally was cut short by a series of sweeping US measures targeting Chinese firms, which included mandates requiring foreign companies listed in the US to comply with US auditing standards or risk delisting. The US also imposed sanctions on chipmakers and tightened export controls on advanced technologies.
What is different this time is the depth of local demand for equities. At the peak of the Chinese sell-off that started in late 2020, mainland funds were net sellers of Hong Kong-listed stocks, exacerbating the foreign capital exodus, particularly in tech. This year, the trend has reversed. Net purchases of Hong Kong-listed equities by mainland Chinese funds have surged to over $1.1bn in a single day, pushing inflows to nearly $30bn for this year.
The recent rally in Chinese tech stocks was never just about fundamentals. It was also a bet that geopolitical tensions, while persistent, would remain in the background rather than dictating the market’s direction. This week’s slide suggests that assumption was overly optimistic.
june.yoon@ft.com