Supported by innovation and the government, technology is the only Chinese sector offering great visibility.

Technology now lies at the heart of China’s growth strategy. This shift, underscored by President Xi in February at a forum dedicated to private enterprise, marks a stark contrast with the regulatory crackdown on digital giants in 2020. It also sends a strong signal: China’s status has evolved. The country is asserting itself in the race for technological supremacy, propelled by DeepSeek’s breakthrough, and the government’s backing is generating strong momentum.

This means that the sector stands out for its strong visibility, as the Chinese economy remains under pressure, further exacerbated by ongoing trade tensions with the United States. While these uncertainties call for caution across the broader market, technology presents an accessible option for investing in China.

The DeepSeek moment

For years, macroeconomic and geopolitical concerns have overshadowed the potential of AI in the world’s second-largest economy. This changed overnight with the emergence of DeepSeek in January. Against daunting US semiconductor chip restrictions, a small Chinese start-up developed a groundbreaking ‘reasoning’ AI model – one that was cheap, open-sourced, and which delivered performance that was comparable to the world’s best.

Investors took notice – innovation was not only alive but also highly valuable in China; new AI developments rapidly sprouted up across the country. By March, Alibaba, China’s largest e-commerce and cloud services company had miniaturised a model to just 32 billion parameters (compared with the original DeepSeek-R1’s 671 billion), and a little-known start-up released Manus, the world’s first general AI agent that can execute complex real-world tasks independently. 

What about the tech crackdown?

In February, President Xi met with China’s top technology entrepreneurs in a nationally televised summit, telling them to ‘first prosper, then promote common prosperity’. This rare public show of affection sent a clear message that tech companies are loved once again.

In practice, the crackdown on China tech that started with the cancellation of Ant Group’s record-breaking IPO in late 2020 had already been over for two years. Signs of a shift in stance first started in 2023 with eased restrictions and the end of investigations. By 2024, business operations for tech platforms had been fully normalised.

This poses the question: what changed? Despite ongoing stimulus measures and recovery efforts, China’s economy continues to be mired in a prolonged housing slump and spiralling youth unemployment. According to the State Council, the private sector contributes about 60% of China’s GDP, 80% of urban employment, and 90% of new jobs. ‘New economy’ companies accounted for 18% of the country’s GDP in 2023, all of which are privately owned. To save its economy, China needs ‘animal spirits’ to return to its private sector, especially tech companies.

Technological superiority has become much more critical in China’s continued rivalry with the US in the AI age; its leaders understand this and will do all they can to support their tech champions.

Are we late to the party?

There may be significant runway left to the rally. The Hang Seng Tech (HSTECH) index, representing the 30 largest tech companies in China, has already delivered a world-beating +25% performance year-to-date. However, the index is only trading at 17.3x forward P/E, 29% below its five-year average of 24.4x, and still far below its peak of 46.4x in early 2021.

At 26x forward P/E, the Nasdaq continues to trade at a 50% premium to the HSTECH. Interestingly, this has not always been the case: prior to April 2023, the Nasdaq had been similarly priced or even cheaper than the HSTECH. Optimism in AI has lifted the Nasdaq and left China tech valuations trailing. The gap can potentially narrow again as investors assign more value to AI in China.

Earnings have been no slouch

Aggregate earnings estimates on the HSTECH have increased 97% from their bottom in March 2023. Over the same period the index has only appreciated 37% in stock markets, significantly lagging behind the uplift in earnings, leading to valuation compression.

Looking ahead, the ‘Terrific Ten’ – 10 of the biggest tech companies that collectively make up 48% of the MSCI China index – are now projected to grow earnings at an accelerating pace: 12% in 2025 and 15% in 2026. This grouping trades at 18x forward P/E and will likely see earnings upside as business conditions continue to improve under government stimulus measures and as AI gradually makes a positive impact on monetisation.

The opinions expressed herein are correct as at 25 March 2025 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.