The recent unveiling of a competitive large language model by Chinese startup DeepSeek has ignited a surge of investment in China’s AI sector. Investors are betting on DeepSeek’s innovation to fuel a technological boom and potentially shift the balance of power in the ongoing U.S.-China tech rivalry.
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DeepSeek’s announcement of a cost-effective large language model, comparable to those developed by OpenAI and Meta, has been hailed as a watershed moment by analysts. This breakthrough has spurred a wave of optimism, driving significant investment into Chinese chipmakers, software developers, and data center operators. The surge also coincides with rising nationalistic sentiment encouraging a re-evaluation of Chinese assets amidst renewed trade tensions with the U.S.
The Hang Seng AI Index has seen a significant increase of over 5% this week, while indices tracking chipmakers and IT firms have surged more than 11%. This remarkable growth has helped stabilize the Hong Kong market despite the recent imposition of a 10% tariff on Chinese imports by the U.S. Mainland investors returning from the Lunar New Year holiday have also joined the frenzy, further boosting shares in AI, semiconductor, big data, and robotics companies.
DeepSeek: A Catalyst for China’s AI Revolution?
Experts predict a surge in AI applications by 2025, driven by widespread adoption across various consumer and business sectors. Huaxi Securities has identified several potential beneficiaries of this AI revolution, including Nancal Technology (603859.SS), Suzhou MedicalSystem Technology (603990.SS), Doctorglasses Chain (300622.SZ), Bestechnic Shanghai (688608.SS), and Ucap Cloud Information Technology (688228.SS).
TF Securities argues that U.S. attempts to hinder China’s technological progress have inadvertently accelerated innovation within the Chinese AI landscape. The firm advocates for a reassessment of Chinese technology stocks, which have lagged behind their U.S. counterparts due to regulatory scrutiny and geopolitical tensions. While tighter U.S. technology export restrictions are anticipated, experts believe this will only further incentivize government support and accelerate growth in China’s AI sector.
The Potential Impact on Chinese Equities
Goldman Sachs anticipates that China’s advancements in AI development and application could significantly alter the trajectory of the stock market. The bank estimates that AI-driven efficiency improvements could boost earnings by 2% for Chinese equities, with growth prospects potentially leading to a 20% valuation increase. This could narrow the gap with U.S. peers, whose “Mag 7” tech stocks currently boast a price-to-earnings ratio of 31, compared to 23.6 for Chinese “hard tech” stocks and 13.9 for “soft tech” shares.
DeepSeek’s impact extends beyond the financial markets. Leading Chinese companies, including Huawei Technologies, Alibaba, and Baidu, are exploring collaborations with the startup to leverage its cost-effective AI services.
A Cautious Note Amidst the Excitement
While optimism pervades the market, some investors remain cautious. The profitability of AI remains a concern for some, highlighting the inherent risks associated with emerging technologies. Despite the widespread enthusiasm, a prudent approach to investment is warranted, considering the long-term viability and profitability of AI-driven businesses.
In conclusion, DeepSeek’s groundbreaking achievements have injected renewed vigor into China’s AI sector, attracting substantial investment and sparking optimism about the future of Chinese technology. While challenges and uncertainties remain, the potential for transformative growth in this dynamic landscape is undeniable.
