China's Tech Rally: Structural Momentum vs. Overheating Signals

The rally in China's tech sector is not a fleeting sentiment. It is a structural response to a national strategic imperative: achieving technological self-reliance. This push is being fueled by a massive, visible deployment of capital, creating a powerful momentum that is now testing the market's capacity. The fundamental driver is Beijing's policy focus on "new quality productive forces," a directive that has crystallized into a concrete capital flow toward AI and semiconductors.

The scale of this capital deployment is staggering. In 2025, the number of Chinese artificial intelligence unicorns surged by 350 percent, jumping from two to nine. This explosive growth in high-potential startups is now translating directly into public market activity. In early January alone, three tech firms raised a combined $1.19 billion in Hong Kong, with AI and semiconductor companies leading the charge. The market's appetite is evident in the valuations, as seen with AI startup MiniMax, whose market cap soared past HK$100 billion after its debut. This pipeline is far from exhausted, with more firms like Huawei's AI server spin-off preparing for listings.

This capital influx is meeting a market in a state of heightened activity. Last week, the A-share market saw its turnover reach a record 3.65 trillion yuan ($523 billion). The momentum is broad-based, with the Shanghai Composite Index hitting a multi-year high and more than 70% of tech stocks closing higher on Monday. Analysts see this as the start of a prolonged bull market, one they believe is being powered by the AI revolution itself, much like the internet era did two decades ago.

The setup points to a powerful, long-term trajectory. Earnings growth for a gauge of China's tech megacaps is poised for a major inflection point in 2026, when it is expected to overtake the Magnificent 7 for the first time since 2022. This isn't just about catching up; it's about a structural shift in the global tech landscape. The policy tailwinds are clear, and the capital deployment is massive. The current pace of the rally, however, is the market's first test of whether it can sustain this structural momentum without overheating.

Financial Market Mechanics: Leverage and Sector Concentration

The structural momentum in China's tech rally is now being amplified-and tested-by powerful financial market mechanics. The surge in investor enthusiasm is translating into heightened leverage and extreme sector concentration, creating early signs of strain that could temper the advance.

The most visible signal is a sharp spike in margin lending. In January, the value of margin trading jumped 1.8% to 2.65 trillion yuan, marking the largest monthly increase in three months. This surge in borrowed capital directly fuels the rally, particularly in the most speculative corners of the market. The concentration is stark: the Star 50 Index, which tracks technology firms, has risen over 9% in January alone. This shows leverage is not broadly distributed but is instead concentrated in the very sectors driving the bull market.

This concentration, combined with the sheer pace of gains, has pushed key indices into overbought territory. The 14-day relative strength index for the Shanghai Composite hit 81 on Monday, its highest level since August. Such readings are a classic warning sign that a rally may be exhausting itself, leaving the market vulnerable to a pullback.

The cooling signals are already emerging in some of the most speculative sectors. Shares of companies tied to commercial aerospace, which saw wild rallies on policy optimism, are now showing clear fatigue. After surging 90% and 127% since December, stocks like Hunan Aerospace plunged as much as 20% following company warnings. These firms explicitly cautioned that recent rallies had outpaced underlying fundamentals, a direct call for investors to exercise prudent judgment. This is the market's first real test of whether speculative fervor can be cooled by corporate warnings before regulators step in.

The bottom line is that the rally's mechanics are creating a fragile setup. The combination of high leverage, extreme sector concentration, and overbought conditions increases volatility risk. While the broader market may still have room to run on strong fundamentals, the path is likely to become choppier as these internal strains come into sharper focus.

Forward Scenarios: Catalysts, Risks, and the Policy Tightrope

The sustainability of China's tech rally now hinges on a delicate balance. The primary catalyst is clear: Beijing's unwavering policy push for "new quality productive forces." This directive provides a powerful, structural tailwind that is already reinforcing growth and attracting capital. The market's momentum is a direct reflection of this strategic bet, with analysts framing the current bull run as a multi-year event driven by the AI revolution itself.

Yet this powerful tailwind is met by a rising headwind of speculative excess. The recent plunge in shares of companies like Hunan Aerospace, which fell as much as 20% after company warnings, signals a potential regulatory "cooling" of fervor. These explicit cautions that rallies have outpaced fundamentals are the market's first direct signal that the policy support for growth may be paired with a need to curb irrational speculation. The risk is that this cooling, if it accelerates, could abruptly deflate valuations in the most overheated corners.

The ultimate test, however, will be earnings. The rally's long-term credibility depends on the ability of listed tech firms to deliver. A critical metric is the projected inflection point for China's tech megacaps, which are expected to overtake the Magnificent 7 for the first time since 2022 in 2026. If this materializes, it would validate the structural thesis and provide a fundamental anchor for the market. If it falters, the rally risks becoming a story of valuation expansion without corresponding profit growth.

This sets up a classic policy tightrope. Authorities must continue to support the strategic development of AI and semiconductors to achieve self-reliance, but they also face pressure to manage market stability. The current setup-a record-high trading volume, an overbought Shanghai Composite with an RSI of 81, and extreme sector concentration-creates a volatile environment. The path forward is likely to be choppier, as the market navigates between the powerful structural momentum of policy and the need to cool speculative froth. The investment thesis now is one of high conviction tempered by heightened risk.