When Bonnie Chan Yiting was in Davos six weeks ago for the World Economic Forum's (WEF) annual confab, the Swiss ski resort was abuzz with a groundbreaking app that a little-known artificial intelligence (AI) start-up had released half a world away in China.
Hangzhou-based DeepSeek rolled out its namesake app on January 20, providing its low-cost large language model (LLM) for free on the same day that the WEF got under way.
Within two days, DeepSeek had overtaken OpenAI's ChatGPT as the most downloaded freeware app on the iOS app store in the US. On Wall Street and elsewhere, DeepSeek sparked a re-rating of Chinese stocks, unleashing a torrent of money into the world's second-largest capital market.
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"In the last two weeks, the world [has been] waking up to [the realisation] that the valuation that they've been attaching to the top bucket of US stocks over the last two years may need some revisiting, especially with the arrival of DeepSeek," Chan, the CEO of Hong Kong Stock Exchanges and Clearing, said at a conference in Kuala Lumpur on February 17, recounting the buzz in Davos.
HKEX CEO Bonnie Chan speaks at the SCMP China Conference in Kuala Lumpur on February 17. Photo: Nora Tam alt=HKEX CEO Bonnie Chan speaks at the SCMP China Conference in Kuala Lumpur on February 17. Photo: Nora Tam>
Nvidia, the dominant maker of the chips that power AI applications, lost US$600 billion of value on January 27 when its stock plunged 17 per cent, as investors realised that LLMs could be developed at a fraction of the cost in terms of high-powered computing. The stock has retreated by another 4 per cent since then, reinforcing the reassessment of US technology stocks.
"As soon as you realise that the same [leading edge] technology [such as in AI] can be created with a lot less cost, people start wondering whether the valuation allocated to that stock is a reasonable one," Chan said. "Hopefully with that review, [investors] are going to realise the attractiveness of stocks in this region."
Goldman Sachs was one of the first global investment banks to re-rate China's stocks last month. It revised the 12-month target for the MSCI China Index, which includes shares listed onshore and overseas, upwards by 13 per cent to 85, and for the CSI 300 Index of the largest yuan-denominated Chinese stocks by 2.2 per cent to 4,700. That implied a return of 16 per cent and 19 per cent, respectively, from then levels. If these targets came to fruition, that would bring new inflows of US$200 billion, it added.
The Hang Seng Index, the benchmark tracking Hong Kong's US$6 trillion stock market where Chinese companies make up three-quarters of the value, has become the best-performing equity gauge globally this year, advancing 21 per cent. An index of Chinese tech behemoths trading in the city - from Alibaba Group Holding to Tencent Holdings - galloped into a bull market last month. Alibaba owns the Post. China's onshore markets have also stabilised, with investors snapping up fledging tech names.
The optimism quickly spread to the rest of the market after Jack Ma Yun, the co-founder of Alibaba, who had largely vanished from public view following a crackdown on the tech sector, appeared at a meeting of Chinese business leaders with President Xi Jinping last month. The gathering was largely interpreted as an official end to the regulatory clampdown and a reaffirmation of the government's support for the private sector.
"Green shoots are now visible, particularly in the tech sector, where companies such as DeepSeek highlight China's competitiveness and attractive valuations," said Gary Dugan, CEO of The Global CIO Office, a provider of outsourced investment services. "Economists are growing more confident. Bank lending has also picked up, supporting small and medium-sized enterprises."
More global investment banks have joined the chorus. Deutsche Bank hailed DeepSeek's ascent as China's "Sputnik moment", alluding to the 1957 launch of the world's first man-made satellite by the former Soviet Union, which caught the West unawares and raised the profile of the erstwhile communist country.
Societe Generale went as far as labelling Alibaba, Tencent, Xiaomi, BYD, Semiconductor Manufacturing International Corporation, JD.com and NetEase as the "Seven Titans" of China's stock market, likening them to the "Magnificent Seven" of Wall Street: Nvidia, Apple, Amazon, Microsoft, Google parent Alphabet, Facebook owner Meta Platforms and Tesla.
DeepSeek, whose largest shareholder is its founder Liang Wenfeng, is among another subset of unlisted tech behemoths dubbed the "Fantastic Four", which also includes ByteDance, drone maker DJI and humanoid robot maker Unitree.
As a result, the re-rating is under way. The 35 per cent surge this year in the Hang Seng Tech Index, which tracks the 30 most valuable stocks in Hong Kong, has boosted the gauge's price-earnings multiple to 25.3 times from 21.8 at the start of the year, according to Bloomberg data. Alibaba has jumped 70 per cent in the span, catapulting the stock to a three-year high and its valuation to 16.2 times earnings from 9.3, while Tencent is valued at 27.3 times, recovering from a low of 18.9 after a 28 per cent rally.
Despite the sizeable gains, the Seven Titans still trail the Magnificent Seven, which trade at an average multiple of 32.3 times, while Nvidia, the chipmaker at the centre of the global AI frenzy, was valued at 37.6 times, Bloomberg data showed.
If history is a guide, the DeepSeek-spurred trade has further to go. US stocks have risen about 50 per cent, with the tech sector alone gaining US$13 trillion in market capitalisation since OpenAI launched ChatGPT in November 2022, according to Goldman Sachs.
The US bank expects the valuation gap between Chinese and US tech stocks to narrow further, noting DeepSeek's breakthrough could boost corporate earnings by 2.5 per cent annually over the next decade through productivity gains, cost savings and fresh revenue opportunities.
"The latest technology breakthroughs are more micro- and innovation-driven in nature, and are conducive to valuations as well as to earnings, which might give the recovery more staying power than those that were purely driven by policy news and expectation repricing," Goldman analysts led by Kinger Lau said in a report last month.
Mainland Chinese investors are on a buying spree, ploughing US$35.9 billion into stocks listed in Hong Kong this year in some of the most aggressive purchases on record, as the re-rating of the nation's biggest technology companies helps fuel a world-beating market rally.
Onshore traders spent HK$152.8 billion (US$19.7 billion) on the stocks in February through the Stock Connect programme, adding to the HK$125.6 billion invested in January, according to data from the Hong Kong stock exchange. The inflows only trailed the record HK$310.6 billion in January 2021.
China's tech stocks would continue to outperform on improving fundamentals, encouraging shareholder returns and macro policy support, according to UBS' global wealth management unit, which prefers large-cap companies, leading cloud platforms and semiconductor makers. The Swiss bank estimates the combined market value of the AI industry in China will rise to US$480 billion in 2028 from US$350 billion now.
Still, not everyone is convinced. Whether the rally could be sustained depended on the monetisation of LLMs and a recovery in China's consumption spending, according to Wang Kai, a strategist at US investment firm Morningstar.
"I'm not sure if it's sustainable," he said. "A lot of tech names are rising because of the enthusiasm over home-grown LLMs. But that does not necessarily translate into more revenue. The rally will only be sustainable if these LLMs directly benefit or generate revenue for these companies."
Nomura Holdings said China's macro picture was cloudy, noting that the emergence of low-cost, but highly efficient AI apps was likely to disrupt the jobs market and lead to higher unemployment. At the same time, geopolitical tensions were likely to remain elevated in the coming months because of the tit-for-tat tariff war between the US and China and increased US pressure on the technology front, according to the Japanese brokerage.
For Alex Au, founder and chief investment officer of Alphalex Capital Management in Hong Kong, any pullback would mean an opportunity to buy the dip.
"Investors have realised that China is still able to develop its own technology with very limited resources," he said. "That means China can continue to innovate and possibly lead the world in technology, along with the US. This will have a significant impact, particularly in terms of confidence, on foreign investors."
China's deflation, another major concern among investors, would be no longer a hurdle for stocks, thanks to tech innovation, according to Morgan Stanley. The Wall Street bank noted that tech-heavy companies could deliver higher profit margins and return-on-equity ratios even in an deflationary environment based on Japan's experience, it said.
On top of DeepSeek's breakthrough, China had a host of advantages such as a vast pool of engineers, data, a well-established social network and e-commerce ecosystem, as well as potential government support, the US bank said. It raised the year-end price target for the MSCI China Index by 22 per cent to 77 and that for the Hang Seng Index by 24 per cent to 24,000.
The implications of DeepSeek's rise go far beyond the stock market. Following the hype surrounding the AI start-up, Beijing orchestrated the high-stakes meeting with China's leading entrepreneurs on February 17, in which President Xi promised to render support for the private sector to placate the attendees that included Alibaba's Ma.
The symposium revived investors' confidence and removed one of the last remaining overhangs on Chinese equities: a fickle policy stance on the private sector. Tech companies were subjected to years of curbs that followed the last-minute scuttling of Alibaba affiliate Ant Group's US$39 billion initial public offering in November 2019.
"The macro impact of DeepSeek on the equity market is arguably stronger than the interest rate cuts and policy stimulus announced last year," said Zhang Zhiwei, chief economist at Pinpoint Asset Management in Hong Kong. "It may change the way the government views the role of private enterprises in the economy. After all, innovation is a key driver for productivity."
The continuing policy measures may support the DeepSeek-induced rally. In a government work report delivered to the annual legislative National People's Congress this week, China pledged to advance AI development by supporting wider adoption of LLMs and integrating the technology to promote industrial innovation.
"This time, we expect the stock market gains initiated by DeepSeek to mark the start of a multi-year revaluation of Chinese equities," said Edith Qian, an analyst at CGS International in Hong Kong.
