DeepSeek Breakthrough Fuels Rally in Chinese Tech Stocks

The Chinese tech sector has been on a roll lately, with the Shanghai Composite Index and ChiNext Index posting strong gains for the second consecutive session on Friday, February 8, 2025. The rally was fueled by the breakthrough of DeepSeek, a Chinese private AI startup, which reconfirmed China's capability to innovate in AI and may promote global investors to fully recognize China's advantages in wider areas. Analysts believe that this development could push the A-share market to exceed prior highs in the medium term.



The rise of DeepSeek not only reconfirmed China's capability to innovate in AI but also highlighted the potential for Chinese tech companies to narrow the valuation gap with their US counterparts. David Chao, global market strategist for Asia-Pacific (ex-Japan) at Invesco, noted that Chinese equities, and especially Chinese technology companies, are priced at a steep discount compared to their US counterparts. As China's technological achievements become more apparent, the valuation gap is expected to narrow, making Chinese tech stocks more attractive to investors.



The breakthrough of DeepSeek has also attracted foreign investment, with leading foreign brokerages and investors upgrading or buying related stocks. JPMorgan, for instance, upgraded a slew of Chinese internet and tech companies, including Alibaba Group, Tencent Holdings, NetEase Inc, and Meituan, to overweight. This increased recognition of Chinese tech companies' potential has boosted market sentiment, driving further gains in the A-share market.



The Chinese government's increased financial support for high-quality science and technology enterprises is also expected to influence the A-share market's performance in the medium term. The guideline released by the China Securities Regulatory Commission (CSRC) vowed to increase support for strategic industries such as next-generation information technology, AI, aerospace, new energy, new materials, high-end equipment, biomedicine, and quantum science and technology. This targeted investment is expected to boost innovation and growth in these sectors, which in turn should drive the performance of related A-share companies.

In conclusion, the breakthrough of DeepSeek has fueled a rally in Chinese tech stocks, with analysts expecting the A-share market to exceed prior highs in the medium term. The narrowing valuation gap, increased foreign investment, and government support for strategic industries are all contributing factors to this positive outlook. However, investors should remain cautious and monitor the market's performance closely, as new US tariffs on Chinese goods may trigger risk-aversion and bring pressure on A shares.