Unhedged
Chinese Equities
Chinese equities are back in the conversation. Although they dominated headlines in October, after the Chinese government sparked a rally with promises of fiscal stimulus, investors lost interest when that spending spree never materialized. But since mid-January, there has been a sustained bull run; the MSCI China index is now near its October peak.
[Image: Line chart of MSCI China index ($) showing]
Some of this is cosmetic. In mid-January, Beijing directed state-owned insurance companies and money market funds to allocate more to Chinese equities — mechanically driving up prices and drawing in short-term investors hoping to make a buck. But there are fundamentals at work here, too. Investors are reassessing China’s tech prospects and the country’s ability to capitalize on AI.
The AI Race
Two developments changed the picture. First, Chinese company DeepSeek transformed the AI race. More recently, Alibaba founder Jack Ma — who has been out of the limelight since criticizing government regulations in 2020 — appeared at a government symposium, where Chinese leader Xi Jinping seemed to embrace both Ma and the private sector.
[Image: Bar chart of CSI 300 sub-index year-to-date returns (%) showing Tech rally]
Tech Rally
Tech has carried the broader market rally ever since; the Shanghai Shenzhen 300 infotech sub-index is up 9% since the start of the year, driven by domestic semiconductor companies and bigger AI players such as Alibaba and Tencent.
Conclusion
In some regards, this reassessment was long overdue. The biggest publicly listed Chinese tech companies — Alibaba, Tencent, Meituan, Baidu, Pinduoduo, and JD.com — have all seen earnings growth since 2021 and are expected by analysts to see even bigger growth over the next two years. At the same time, their share prices have been thrown off course by regulation. If Ma’s reappearance and Xi’s pronouncements are to be taken seriously, the government might get out of the tech sector’s way, and the stocks may approach their prior peaks. But, as is always the case with China, we do not know exactly what the government will do.
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Frequently Asked Questions
Q: What is the current state of Chinese equities?
A: Chinese equities are back in the conversation, with the MSCI China index near its October peak.
Q: What has driven the recent rally in Chinese equities?
A: A combination of fundamentals, such as reassessing China’s tech prospects and the country’s ability to capitalize on AI, and cosmetic factors, such as increased allocation from state-owned insurance companies and money market funds.
Q: What is the significance of DeepSeek’s transformation of the AI race?
A: It has demonstrated that Chinese companies can compete on AI, erasing some of the US’s leads in the field.
Q: What are the next steps for Chinese equities?
A: The market will depend on regulation, with a potential for a longer bull run if the government gets out of the tech sector’s way.
