During the Lunar New Year, DeepSeek ignited a market frenzy, fueling a rally that sent A-shares and Hong Kong stocks surging.
Post-holiday, both markets opened strong, with Hong Kong’s Hang Seng Index leading global markets throughout February. All three major A-share indices posted gains, with the SSE Composite Index rising 2.16%, the SZSE Component Index up 4.48%, and the ChiNext Index climbing 5.16%.
Since DeepSeek’s January 20 release of its R1 model, the Hang Seng Tech Index has surged by 28.5%, while the Hang Seng Index has gained 20.5% (as of March 5).
Over the past few weeks, a wave of Chinese tech firms has announced their adoption of DeepSeek’s artificial intelligence model, setting off a stock market rally that sent Hong Kong-listed tech giants soaring. Alibaba’s shares jumped over 60%, while Tencent climbed more than 33%, both hitting their highest levels in nearly three years. Kuaishou gained over 28%, and Bilibili rose more than 24%.
At the same time, global investment banks—including Deutsche Bank, Goldman Sachs, and Morgan Stanley—have turned increasingly bullish on Chinese assets. Goldman Sachs reaffirmed its “overweight” rating on A-shares and Hong Kong stocks, while Morgan Stanley suggested that global investors are now reevaluating China’s potential in AI and technology.
But it was Deutsche Bank that made the boldest call. The bank likened DeepSeek’s emergence to China’s “Sputnik moment,” predicting that investors would reassess the competitiveness of Chinese enterprises. The firm forecasted that the valuation discount on Chinese stocks would soon correct, leading to a prolonged bull market in A-shares and Hong Kong stocks, surpassing previous highs by midyear.
The question now is: why has DeepSeek triggered such a shift in foreign investor sentiment? Are the post-holiday stock gains in A-shares and Hong Kong stocks justified, or are they an overreaction? More importantly, how long can this DeepSeek-fueled rally last?
Is foreign capital returning?
Institutional investors—including Morgan Stanley, UBS, GIC, Citigroup, HSBC Investments, Deutsche Bank, and BNP Paribas—have been actively researching A-share-listed companies, signaling renewed interest in Chinese markets. Their bullish outlook isn’t new—it has been building for weeks.
On February 5, Deutsche Bank released a report titled China Eats the World, which painted a bullish picture of China’s industrial ecosystem. The report argued that DeepSeek’s launch represents a “Sputnik moment” for China, reinforcing the country’s dominance in high-value industries and supply chains. It predicted that the valuation discount on Chinese enterprises would soon disappear and that corporate profitability might surpass expectations. According to the bank, the bull market in A-shares and H-shares began in 2024 and will surpass previous highs by midyear.
Two weeks later, on February 19, Morgan Stanley published a report on DeepSeek’s impact, noting that global investors had long undervalued China’s technology and AI sectors. Now, that sentiment is shifting. The bank suggested that this time, the AI-driven market rebound might have more staying power than previous short-lived rallies, leading to increased fundamental investments.
Goldman Sachs followed on February 23, arguing that with valuation advantages and policy support, A-shares could stage a catch-up rally in the next three months, outperforming Hong Kong stocks with an expected excess return of 2%.
There’s little doubt that DeepSeek’s debut has been a key driver behind this wave of bullish sentiment toward Chinese assets. But what exactly makes DeepSeek such a game changer? More importantly, how does it enhance the competitiveness of Chinese enterprises?
How DeepSeek strengthens China’s AI position
Du Houliang, a fund manager at Zhongou Fund Management, believes two factors determine an industry’s long-term potential: the size of its future market and the likelihood of sustained growth.
“DeepSeek significantly increases the probability of an AI boom. In just about a month, it amassed over 30 million daily active users—an adoption curve that investors love to see,” Du said. “Overseas markets have long viewed AI as the next transformative industry, and now domestic investors are starting to align with that perspective. This shift is fueling strong and sustained investment enthusiasm.”
From an industry impact perspective, Yao Wei, a fund manager at Zhonghai Fund Management, outlined five ways DeepSeek enhances the competitiveness of Chinese companies:
- Technological innovation: DeepSeek’s advanced neural network architecture and multimodal AI capabilities improve natural language processing and image generation. This not only strengthens corporate R&D but also accelerates industry-wide progress.
- Open-source strategy: By open-sourcing its DeepSeek-R1 model under the MIT license, DeepSeek allows free deployment, modification, and commercial use. This significantly lowers AI adoption barriers and fosters widespread innovation.
- Algorithmic efficiency: DeepSeek has developed more efficient training methods that reduce computational power requirements. This allows smaller businesses and developers to enter the AI space, driving broader adoption.
- Expanding applications: DeepSeek’s model is already being used across gaming, video production, and social media, with future potential in finance, healthcare, and education—accelerating digital transformation in these industries.
- Global competitiveness: DeepSeek challenges the dominance of global AI giants, giving China greater influence in the AI space while opening new collaboration opportunities for Chinese firms.
Yao believes key beneficiaries include cloud computing providers, AI application developers, hardware solution providers, and firms specializing in ecosystem services and traffic operations.
Du, meanwhile, categorized the AI industry into four key segments: overseas computing power, domestic computing power, applications, and end-user devices. He noted that demand for AI chips is rising across all markets, with investment opportunities emerging in both foreign ASIC chip industries and China’s domestic semiconductor ecosystem.
He also predicted that application-side growth would accelerate first, as open-source models and industry-specific data lower the cost of AI deployment. Consumer adoption, however, may take longer. “If breakthroughs occur in 2025, we could see AI glasses and in-car assistants gain significant traction,” he said.
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Is the market overreacting?
Compared to the slower-moving A-share market, Hong Kong’s tech stocks have been on a tear. In February alone, the Hang Seng Index surged 13.4%, the Hang Seng China Enterprises Index gained 14.02%, and the Hang Seng Tech Index soared 17.88%.
This outperformance stands in stark contrast to global markets. Over the same period, the Dow Jones fell 1.6%, the Nasdaq declined 4%, and the S&P 500 dropped 1.4%. The FTSE 100 rose slightly by 1.88%, while Japan’s Nikkei 225 slid 5.97%.
So, is Hong Kong’s rally a rational response to DeepSeek’s impact, or is it just speculative hype?
According to Luo Jiaming, a fund manager at Zhong Ou Asset Management, the surge is primarily driven by tech stocks. “DeepSeek represents a major breakthrough in AI, fundamentally reshaping how investors view China’s technological capabilities,” he said.
Despite the rally, valuations remain reasonable. Data from Wind shows that as of March 5, the Shanghai Composite Index had a price-to-earnings ratio of 14.37, while the CSI A500 Index’s ratio stood at 14.54—both still near historical lows.
With earnings season approaching, investors will soon see whether DeepSeek’s impact is reflected in corporate fundamentals.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Wang Hanyu for 36Kr.