Four reasons to buy China tech, and one fatal snag

Shuli Ren, Bloomberg

Chinese tech companies are suddenly hot.

The Hang Seng Tech Index has soared 23% this year, far outpacing the Nasdaq 100’s 5.3% gain. Alibaba Group Holding Ltd. and Tencent Holdings Ltd.’s shares are back to their 2022 levels, while EV makers BYD Co. and Xiaomi Corp. hit new record highs.

The trillion-dollar question now is whether global investors late to the game can still chase the rally. While China’s big tech companies remain cheap by historical standards, buying them is not for the faint-hearted. Over the last five years, the investing world has undergone grief, anger and resignation as the government’s regulatory actions killed their golden goose.

But the vibe surrounding China is improving, and there are four good reasons to believe this rally has legs — with one major obstacle.

First, the primary cause of Chinese tech’s loss of value in recent years has been regulatory crackdowns. Ironically, internet platforms’ political fortunes are improving as the economic slump drags on. Beijing now relies on Big Tech to provide income for people who have lost their jobs.

Indeed, President Xi Jinping uncharacteristically attended a meeting with Jack Ma — the highest-profile casualty of the government’s campaign — and other prominent entrepreneurs on Monday in a show of support for the private sector after years of turmoil. Symbolically, it means Big Tech is no longer perceived as the villain that squeezed small businesses and choked young startups. The companies have become essential to social stability — partly resolving Beijing’s unemployment problem, especially with the young college graduates who might prefer live streaming and building personal brands to mind-numbing desk jobs.

Second, investor positioning matters. DeepSeek, a little-known upstart that created an artificial intelligence model almost as powerful as OpenAI at a fraction of the cost, was a wake-up call to global asset managers in their single-minded pursuit of the Magnificent Seven. Evidence is mounting that China Inc. is outcompeting the world, and allocators have to reflect that new realization in their portfolio construction. This rally has room to go if more reshuffle their holdings and diversify away from US exceptionalism.

Third, the geopolitical landscape has also become more benign. During the Biden years, global investors fled, worried that more Chinese companies would be placed on US sanctions lists as Beijing stood by the Kremlin in the war against Ukraine.

Fourth, China’s macroeconomic conditions may have improved, too. In January, new money supply hit a record high, boosted by a fiscal push that Xi had promised last September. New government bond issues totaled 693 billion yuan ($96 billion), up from 295 billion yuan a year ago. Meanwhile, Beijing is aiming to prioritize domestic consumption, which bodes well for consumer tech stocks.

So the stars seem aligned in the country’s favor — but for one snag, in my view. China remains an ultra-competitive market. Its best and brightest will continue to be at each other’s throats, fighting over market share, adding deflationary pressure, and pushing down corporate profits.

The verdict is still out as to whether the stock market can come out of hibernation. But one thing is certain: China, which has been brushed away by global investors, is exciting again. [Abridged]

Courtesy Bloomberg/Shuli Ren