China’s Stock Boom Is Not a Repeat of 2015

Shuli Ren, Bloomberg

China is in the midst a stock boom. The blue-chip CSI 300 Index is up 9% so far this month, while the tech-heavy ChiNext Index has soared 18%, leaving the S&P 500 in the dust.

As animal spirit starts to awaken, there are concerns that we are seeing a repeat of 2015 — a euphoric rally in the first half of the year followed by an equally spectacular bust that sent the CSI 300 tumbling 47% on concerns gains were unsustainable.

The current economic backdrop certainly draws parallels. There has been producers’ deflation for almost three years, the longest spell in a decade. The government is talking about ending the price wars that have been eroding corporate profits, reminiscent of the so-called supply-side reform introduced in 2015. Margin transactions, a measure of risk appetite, are at a decade high.

How can the stock market be doing so well while the economy is in deflation? It looks like China is once again entering a liquidity-driven bubble. Before reaching this conclusion, however, it’s worth asking which companies are market darlings and whether their earnings justify investors’ love.

Unlike a decade ago, when the central bank’s interest rate cuts triggered the stocks frenzy, artificial intelligence is underpinning the latest rally, creating new mega caps along the way.

A new China-buys-China narrative is rapidly taking hold. Last week, DeepSeek released an upgrade to its flagship V3 model, changing configurations to accommodate the next-generation of homegrown chips. Meanwhile, Nvidia Corp. reportedly halted production related to its H20 AI chip, which is tailor-made for the Chinese market, after Beijing told tech companies to stop buying them due to national security concerns.

In other words, China not only wants its own generative AI models, but to power them with its own hardware, too. Listed companies that had passed DeepSeek compatibility tests, including Beijing-based chipmakers Cambricon Technologies Corp. and Hygon Information Technology Co., have soared in value.

Meanwhile, as the earnings season unfolds, the report card is not bad at all. Among the 65 tech firms in the CSI 300, 28 have released second-quarter earnings, with average sales and profit growth of 11.4% and 15.5%, respectively, the best in a year. Revenue at Hygon, whose shares have jumped 51% this month, rose 41% from a year ago.

At the beginning of the year, the arrival of DeepSeek’s surprisingly good large-language model animated the Hong Kong bourse, where China’s biggest consumer tech firms are listed. The likes of Tencent Holdings Ltd. and Alibaba Group Holding Ltd. touted their own reasoning models, piggybacking on DeepSeek’s success.

Now, we are in the next phase of AI’s transformation of Chinese equities. The focus is on infrastructure names. This time, mainland bourses, where younger hard tech firms often go public, are the bigger beneficiaries. They are simply playing catch-up to Hong Kong, a phenomenon not seen in 2015.

At first glance, some of the valuation metrics can be daunting. Market darling Cambricon, for instance, trades at 66 times forward sales, well above Nvidia’s 19 times, which in itself is expensive. But we are looking at a revolutionary technology at an early evolutionary stage. Before monetization starts to take shape, it’s too early to say whether a stock is overvalued or not. It would be better to gain exposure to the overarching theme instead. Goldman Sachs Group Inc., always forward-looking, lifted its price target on Cambricon by 50%, valuing the company at nine times 2030 sales.

Most of us agree by now that AI is disruptive. As such, investors must avoid linear thinking and drawing too many parallels with the past. Amidst all the frenzy, China’s $12 trillion market is just trying to find its own version of Nvidia.

Courtesy Bloomberg/Shuli Ren