Alibaba, SMIC lead China’s AI-driven market revival, but worries of overheating linger
News Summary
In 2025, major Chinese indexes have surged over 40% driven by Artificial Intelligence (AI), outperforming US benchmarks. Tech giants like Alibaba, SMIC, Tencent, and Baidu are leading the rally, with AI investments escalating across the economy. The Chinese government has positioned AI at the heart of its economic strategy, pledging an $8.4 billion investment fund for startups and aiming for 70% and 90% AI application penetration in selected industries by 2027 and 2030, respectively. Alibaba has committed to expanding its AI budget to $53 billion over the next three years, emerging as a flagship AI player with its stock doubling this year. However, analysts caution that market valuations are stretched and fundamentals lag behind soaring market prices. The MSCI China Index is trading at 12.8 times forward earnings, above its 10-year average of 11 times, while consensus earnings estimates for 2025 and 2026 continue to decline. Experts note that gains are primarily driven by multiple expansion rather than profit growth, with concerns of overheating in certain tech pockets. Despite this, many investors remain optimistic, believing successful AI advancements and government stimulus could drive strong returns. Nonetheless, significant risks include oversupply from industrial policies, potential regulatory interventions, and market pullbacks triggered by US tariff threats. Long-term, China's advantages in data, power, and manufacturing position it as the world's "runner-up in AI," but historical volatility and policy influence suggest a cautious allocation approach for investors.
Background
In 2024, Chinese equities experienced a subdued performance, declining in eight out of twelve months, reflecting weak sentiment despite Beijing's efforts to kick-start economic growth. However, the landscape shifted dramatically in early 2025. Investor enthusiasm was turbocharged in January when Chinese start-up DeepSeek claimed to have developed an AI model significantly cheaper to build than those from better-funded American rivals. This announcement energized the market and reinforced Beijing's ambition to catch up with the United States in the AI race. Subsequently, the Chinese government placed AI at the heart of its economic strategy, backing it with dedicated funds, promoting the "AI+" initiative, and easing regulations. Notably, the MSCI China Index suffered a 20% drop as recently as April 2024 in response to US tariff threats, highlighting the market's sensitivity to geopolitical risks.
In-Depth AI Insights
What are the deeper drivers behind China's strong AI market rebound, beyond mere technological advancement? - While technological breakthroughs and application prospects are superficial drivers, the deeper forces involve complex national strategies and capital maneuvers. China aims to leverage AI to leapfrog competitors and circumvent US technological containment, making AI a core industry backed by state will, attracting significant policy-driven funds and state-owned capital. - This top-down impetus, coupled with China's vast data resources and application scenarios, can rapidly generate market enthusiasm in the short term. However, this enthusiasm may not be solely based on pure market supply-demand and corporate profitability, but rather carries a strategic premium. The current divergence between China's AI sector valuations and fundamentals – what long-term risks or opportunities does it signal? - The risk is that if valuation expansion detaches from actual earnings growth, a bubble could form, leading to sharp corrections should market sentiment or policy direction shift. Historical evidence suggests the Chinese market is policy-sensitive and prone to localized overheating due due to capital chasing hot trends. - The opportunity lies in whether these policy supports and investments can ultimately translate into tangible technological moats, industry leadership, and economies of scale. In such a scenario, current high valuations might be justified by future rapid growth. The crucial factor is whether AI applications can genuinely achieve industrial upgrading and efficiency gains, rather than merely remaining conceptual hype. Given the continued Trump administration, beyond general tariff threats, what more targeted external risks could specifically impact China's AI industry? - The Trump administration's