Will the Rally in Chinese Stocks Continue?

TradingKey - Chinese stocks are back in the global spotlight, boosted by optimism over DeepSeek-driven tech stock gains and stimulus from the private enterprise conference.

Goldman Sachs reported that hedge funds made their largest net purchases of Chinese stocks in over four months last week, with nearly all inflows coming from long positions. Fidelity International revealed that it has taken an overweight position in Chinese stocks. Meanwhile, Morgan Stanley’s latest hedge fund positioning report showed that net exposure to Chinese equities has climbed to its highest level in nearly a year, with most buyers coming from Asia and holding long positions rather than covering shorts.  

Source: Factset

DeepSeek Sparks Revaluation of Chinese Assets  

Goldman Sachs recently introduced a new AI investment framework for the Chinese stock market.  

In a report dated February 17, Goldman analysts, led by Kinger Lau, noted that the emergence of DeepSeek-R1—along with other globally competitive and cost-effective Chinese AI models—has reshaped the narrative around China’s tech sector. This shift has strengthened market sentiment in AI-driven growth and its economic benefits.  

Goldman estimates that widespread AI adoption could boost Chinese companies EPS by 2.5% annually over the next decade. Improved growth prospects and increased investor confidence could raise the fair value of Chinese stocks by 15-20%, potentially attracting over $200 billion in portfolio inflows.  

However, while AI presents significant long-term potential for China’s growth trajectory, Goldman emphasized that strong policy support is still necessary to address macroeconomic challenges and sustain stock market gains.  

Private Business Conference Sparks Optimism 

Investor confidence received another boost after a meeting between top Chinese leaders and prominent business figures, including Alibaba co-founder Jack Ma.  

“Having Jack Ma in particular would provide a symbolic end to the tech-sector crackdown, which essentially started with him back in 2020,” said Christopher Beddor, deputy China research director at Gavekal Dragonomics in Hong Kong. “In practice, the crackdown has been over for a while now. But the optics of Xi telling Ma and other tech leaders to go forth and prosper would send a crystal-clear message that the government’s stance has been completely reversed.”  

Following the meeting, the Hang Seng China Enterprises Index extended its recent rally, closing at its highest level since February 2022.  

Alibaba has been one of the key drivers of the market’s surge, with its Hong Kong-listed shares soaring about 60% since January 13. Tencent is also catching up, jumping 7.8% on Monday after announcing plans to integrate DeepSeek’s AI chatbot into WeChat. Tencent’s stock has now climbed nearly 40% from its January lows.  

Source: Reuters

DeepSeek is not the only recent noteworthy development in China. BYD, China’s leading electric vehicle maker, unveiled its new "SkyEye" autonomous driving technology and announced plans to offer it for free on most of its vehicles. The news sent BYD’s stock soaring.  

Meanwhile, concerns over potential U.S. tariffs on Chinese goods—initially feared to be as high as 10%—have eased, further fueling investor optimism.  

Looking ahead, investors are hopeful that China’s upcoming "Two Sessions" (the annual meetings of the country’s top legislative and advisory bodies) will bring additional stimulus measures to sustain the market’s upward momentum. Given ongoing struggles in the real estate sector and broader economic challenges, increased policy support remains critical.  

Institutional Investors Increase Exposure to Chinese Stocks  

Chinese stocks listed in the U.S. have also delivered strong performances this year. The Direxion Daily FTSE China Bull 3X ETF (YINN) has surged nearly 55% year-to-date, while the iShares MSCI China ETF (MCHI) has gained over 16%. Leading U.S.-listed Chinese stocks, spearheaded by Alibaba, have jumped 46%.  

Source: TradingView; Chinese Concept Stock Performance in US Market

Recent 13F filings reveal that several major institutional investors have increased their holdings in Chinese equities. Alibaba, in particular, has continued to attract institutional interest, with Morgan Stanley, Appaloosa Management, and Norway’s sovereign wealth fund all boosting their positions.  

Scion Asset Management significantly increased its exposure to Chinese stocks, holding Alibaba, JD.com, and Baidu while newly adding Pinduoduo, reflecting Michael Burry's bullish outlook on China’s market prospects