The surge in artificial intelligence, particularly driven by technologies like DeepSeek, has ignited a new wave of investment interest among global investors in China's tech landscapePreviously, Morgan Stanley's cautious stance on the Chinese stock market stemmed from concerns surrounding trade tariffs and declining profit forecastsHowever, recent reports suggest a shift in momentum.
Wang Ying, Chief China Equity Strategist at Morgan Stanley, communicated in a recent email to Yicai Global that investors are starting to recognize that China's AI development might not necessitate significant capital expendituresThis outlook persists despite restricted supplies of high-end GPUsThe conversation has now shifted specifically towards AI investment, reshaping the underlying logic of capital allocationChina's unique advantages—such as a large pool of engineers, rich data resources, a mature ecosystem for social networks and e-commerce, as well as expected government support—position it favorably to accelerate the practical applications of AI.
This transformation in investment paradigms appears to be gaining traction, encouraging fundamental investments rather than mere speculation based on short-term government stimulus measures.
Notably, amid the AI and tech boom, related stocks in Hong Kong and among U.S.-listed Chinese firms have experienced significant surgesThe Hang Seng Tech Index has increased by 25% from its year-to-date low, nearing levels seen in October last year, which was a period marked by investor enthusiasm driven by government policies
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For instance, on February 12, Alibaba's Hong Kong shares rose over 8%.
Foreign Capital Flowing into Hong Kong's AI Landscape
The recent momentum in Hong Kong's stock market is remarkable, fueled largely by leading AI companies associated with cloud computing and the internet, many of which are also listed in the U.SThis trend contributes to Hong Kong entering a technical bull market, defined by a 20% increase from its recent low.
Miao Zimei, head of Greater China equities at Janus Henderson Investors, shared insights regarding DeepSeek, highlighting its ability to significantly boost computational efficiency, thereby making AI more cost-effective and broadly applicableIts emergence signals a shift in the landscape of the AI industry, with Chinese AI companies setting new standards for efficiency and innovation, drawing substantial interest from global investors keen on the future trajectory of the AI sector.
While many overseas asset managers remain on the sidelines, exhibiting a cautious long-term outlook, the increasing intrigue is palpableIn contrast, capital from mainland China has already begun to act decisively in this emerging market.
Since the beginning of the year, southbound capital has seen a steady net inflow of $17 billion, predominantly directed towards the IT and communication sectors
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The daily average net inflow has doubled from $420 million in 2024 to $881 million recently.
Breaking down the sectors, the IT sector represents 17% of total net inflows—an increase from 8% during 2023-2024—while the communication services sector has risen to 38%, up from 14%. Since 2025, the average daily net inflow into IT has soared to $148 million, and communication services have seen their average daily inflow reach $332 million.
Despite this growth, Morgan Stanley notes that as of January 31, global long-term funds remain underweight in the IT and communication services sectors, having increased their underweight positions since the year's beginning.
The reduction in trading days due to the Spring Festival, compounded by increased trading thresholds from mechanisms like the Hong Kong-Shanghai Stock Connect, may exacerbate global investors' underweight positions in A-sharesWang Ying posits that overseas investors might reassess the potential within the A-share market.
Alibaba's 8% Surge Continues to Ignite Market Excitement
Morgan Stanley observes that, paralleling the historical trajectory of new technological cycles such as mobile internet, AI's monetization routes typically unfold in three stages: foundational components (like semiconductors), infrastructure layers (such as computing power and data centers), and application levels (including B2B/B2C AI products). DeepSeek's technology has significantly lowered training and inference costs, which is anticipated to accelerate the broad adoption of AI applications.
Currently, early-stage AI infrastructure and application companies seem poised to benefit the most
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As the application landscape evolves and accelerates with burgeoning AI implementations, additional opportunities across various sectors and stocks will likely emergeIn China specifically, the monetization pace for consumer-targeted AI applications is projected to outpace that of enterprise-focused solutions.
Based on thorough analyst research, Morgan Stanley has identified 15 tech companies that stand to gain directly from this trend, with 11 belonging to the IT sector, three from communication services, and one from consumer discretionary.
Leading companies like Alibaba and Tencent are expected to emerge as primary beneficiaries of this AI growth waveOn February 12, Alibaba's stock on the Hong Kong market surged 8%, fueled by growing investor recognition that cloud services will become a significant infrastructure pillar, with Alibaba Cloud positioned as one of the foremost beneficiariesReports have also surfaced indicating Apple’s AI ecosystem, Apple Intelligence, may partner with Alibaba.
Chelsey Tam, a senior stock analyst at Morningstar, remarked, “We see the potential partnership between Alibaba and Apple as a validation of Alibaba's capacity in the AI domain and the strength of its Tongyi Qianwen 2.5 MaxSelecting appropriate partners to deliver a quality Apple Intelligence experience could assist Apple in revitalizing its iPhone sales in China.”
Experts believe that, although the specifics of the commercial collaboration remain undisclosed, the most crucial impact is that Alibaba’s partnership with Apple establishes a benchmark in the industry, potentially prompting more companies to express interest in collaborating with Alibaba.
In fact, optimism surrounding Alibaba's outlook has been predominantly driven by the surge in AI computational demand propelling growth in cloud infrastructure services, which constitutes a pivotal business segment for Alibaba
Speculations regarding Alibaba Cloud's potential independent listing have also gained traction.
The rise of DeepSeek has accelerated the training and inference requirements for AI modelsGiven that robust computational resources are essential for training and deploying these AI models, China’s leading cloud providers are positioned to gain from the rapid expansion of the AI sectorAlibaba Cloud, with its proprietary AI chip "Han Guang," offers high-end GPU cloud services including NVIDIA's H100 and A100, becoming a crucial choice for AI enterprisesMoreover, as more domestic businesses look to develop AI models, they are likely to opt for the elastic computing resources provided by Alibaba Cloud over the construction of their own data centers.
A senior analyst from an overseas stock research institution remarked, "U.S. stocks are generally overvalued, while the fundamentals of Chinese tech stocks are not as bleak, indicating there’s potential for re-ratingHence, opportunities exist within the Chinese tech sector, even the broader Chinese market."
“In the long run, as China’s large-scale models gain traction and more applications emerge, cloud services will evolve into vital infrastructure,” they continuedAs China's largest cloud service provider, coupled with its expansive ecosystem and broad base of B2B merchants, Alibaba Cloud stands poised to be a major beneficiaryAlibaba's Hong Kong shares had a price-to-earnings ratio (P/E) of only 10 times and a price-to-book ratio (P/B) of 1.5 times during the Spring Festival, nearing historical lows, which underlies the recent surge in investor interest.
Data indicates that Alibaba has been undergoing a period of valuation compression in recent years, largely due to market conditions and slowing revenue growth
Nonetheless, profit margins have consistently improved, with EBITDA rising from 15.3% in 2022 to an anticipated 17.5% in 2024, and cash flow remains robust (over 30% of total). The market's focal point revolves around whether Alibaba can maintain the growth velocity of its e-commerce segment amid China's economic recovery and if further splits of its subsidiaries could enhance its overall valuation.
An "Overall Bull Market" Still Awaits Economic Recovery
However, it is impossible to ignore that the current market has yet to pave the way for a "full bull market" (Beta Rally). Instead, it exhibits a pronounced dichotomy between AI/tech stocks and their non-AI counterpartsMany institutions assert that future focus should remain on macroeconomic indicators, particularly the recovery of consumption, forthcoming stimulus measures, and evolving geopolitical risks.
Wang Ying indicated that if Hong Kong's tech stocks were excluded from consideration, a customized index would effectively be flat; in fact, on a market capitalization-weighted basis, it has only increased by 3% since the year's beginningThis highlights that the recent surge in the Hang Seng Index is primarily driven by AI/technology stocks, while other sectors remain subdued.
In the near term, this divergence is likely to persist, as the downward trend of inflation continues to suppress consumption and the performance of traditional sectors
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