Why China tech is rising while US AI stocks stumble

Key points:

• Two markets, different expectations: US AI stocks are under pressure from high valuations and rising capital expenditure, while China tech is rebounding from depressed valuations and low expectations.
• Policy support is helping China tech: Fresh liquidity measures and Beijing's technology self-sufficiency ambitions are supporting sentiment, although a lasting recovery still needs stronger earnings.
• Investors can look beyond US AI concentration: China tech offers selective diversification opportunities, but quality, valuation and disciplined positioning matter more than chasing the latest rally.

China's technology stocks are showing signs of recovery just as US AI stocks enter correction territory. Is this the beginning of a rotation from expensive US technology stocks into cheaper Chinese alternatives, or simply a short-term rebound driven by policy support?

The divergence is becoming hard to ignore

Chinese technology stocks are finding fresh momentum at a time when their US counterparts are struggling.

The contrast is striking, but context matters. The Hang Seng Tech Index lost approximately 12% in October and remains down roughly 30% year-to-date. Its recent recovery is therefore coming after significant weakness rather than a sustained period of outperformance.

The divergence reflects two markets facing very different expectations, policy environments and investment challenges.

In the US, investors are increasingly questioning whether massive spending on AI infrastructure will generate sufficient returns. In China, fresh policy support, lower valuations and hopes of improving sentiment are encouraging investors to revisit a sector that has struggled for much of the year.

Here are five reasons behind the divergence and, importantly, what investors can do about it.

1. China's policy support is arriving at a critical time

The latest rebound in Chinese technology stocks has been supported by renewed efforts from Beijing to strengthen investor confidence.

The People's Bank of China (PBOC) is encouraging financial institutions to make greater use of equity-market support tools and improving the terms of facilities that can finance share purchases and corporate buybacks.

The timing matters. Chinese technology shares have been under significant pressure, with investors concerned about weak domestic demand, intense competition and disappointing earnings.

Policy support is arriving when expectations are already low, making incremental positive developments potentially meaningful for sentiment.

Investor takeaway: Policy support may help stabilise valuations, but liquidity alone cannot deliver a sustained rally. Watch whether rising share prices are accompanied by stronger trading volumes, continued buybacks and improving earnings expectations. A broader recovery would be a stronger signal than a rally concentrated in a handful of large stocks.

2. China is recovering from low expectations, while US tech is adjusting to high ones

Perhaps the biggest difference between the two markets is where they are starting from.

US AI stocks have benefited from years of enthusiasm around artificial intelligence. Investors have rewarded companies exposed to AI infrastructure, chips and cloud computing with substantial valuation premiums.

That has also raised the bar. Strong revenue growth and upbeat earnings are no longer enough if spending rises even faster or future guidance falls short.

China's technology sector is coming from the opposite direction. Years of economic weakness, regulatory uncertainty and investor caution have left many established companies trading at less demanding valuations.

This creates an important asymmetry: US AI stocks may need exceptional results to justify their valuations, while Chinese technology stocks could benefit simply from conditions becoming less negative.

However, not all Chinese technology shares are cheap. Some semiconductor and AI infrastructure companies still command elevated valuations despite the broader market weakness.

Investor takeaway: Look beyond the headline index and compare valuations with earnings growth. Established internet platforms with strong cash generation, improving margins and shareholder returns may offer a different risk-reward profile from speculative AI companies. Avoid assuming that every Chinese technology stock is a bargain.

3. The US AI debate is shifting from growth to returns on investment

The fundamental AI growth story has not disappeared. Demand for computing power, advanced chips and data-centre capacity remains substantial.

But investors are asking a different question: How much of that demand will translate into sustainable profits and free cash flow?

US technology giants are committing enormous amounts of capital to AI infrastructure. While this creates opportunities across the semiconductor and technology supply chains, it also raises questions about depreciation costs, financing requirements and the sustainability of spending.

For companies borrowing heavily to build AI capacity, financing costs and balance-sheet strength are becoming increasingly important.

Chinese technology companies face a somewhat different set of expectations. Many established internet businesses generate revenue from e-commerce, advertising, gaming and digital services. Their valuations are not necessarily as dependent on the next wave of AI infrastructure spending.

China also has its own AI ambitions, particularly around domestic models, semiconductor development and AI applications. But these companies face their own commercialisation challenges, including intense price competition.

Investor takeaway: In the US, focus on companies demonstrating clear AI monetisation, strong balance sheets and disciplined capital spending. In China, look for businesses where improving profitability, cloud revenue, advertising demand or shareholder distributions can support valuations even without an immediate AI earnings boom.

4. Technology self-sufficiency is strengthening China's long-term investment narrative

China's ambitions in artificial intelligence, semiconductors, automation and advanced manufacturing are becoming increasingly central to its economic strategy.

Restrictions on access to advanced US technologies have reinforced Beijing's efforts to develop domestic alternatives. This creates opportunities for companies involved in semiconductor equipment, local computing infrastructure, software and AI applications.

Unlike a purely cyclical recovery, technological self-sufficiency could remain a structural investment theme for years.

However, strategic importance does not guarantee attractive shareholder returns. Companies operating in priority sectors may still face intense competition, pricing pressure, heavy capital requirements and uncertain profitability.

Government support may accelerate industry development without necessarily benefiting every listed company.

Investor takeaway: Investors can distinguish between two areas of China's technology market:

• Established technology platforms: Companies such as Alibaba, Tencent and Xiaomi offer exposure to digital services, consumer technology and AI adoption, with different drivers of revenue and profitability.
• Strategic technology enablers: Semiconductor manufacturers, chip-equipment suppliers, robotics and automation companies offer more direct exposure to China's self-sufficiency ambitions, but may carry greater valuation and execution risks.

The opportunity is to identify companies translating policy support into commercial demand and stronger earnings, rather than buying purely on the basis of government priorities.

5. Investors are looking for diversification beyond the US AI trade

The US equity market has become increasingly concentrated in a relatively small number of large technology companies.

For investors holding broad US or global equity indices, exposure to AI-related companies may already be substantial, even without owning individual AI stocks.

Recent volatility highlights the risk of having too much portfolio performance dependent on one investment theme.

Chinese technology shares offer different economic drivers, valuations and policy catalysts. That makes them a potential source of diversification as investors reassess their exposure to expensive US technology stocks.

There is also a relative-value argument. If US AI stocks face pressure from high valuations and rising spending, investors may increasingly look towards markets where expectations are lower and potential policy support is stronger.

However, diversification does not mean protection from every risk. China technology stocks remain exposed to domestic economic weakness, geopolitical tensions, regulatory uncertainty and currency movements.

Investor takeaway: Rather than replacing US technology exposure entirely, consider China tech as a selective satellite allocation within a diversified portfolio. Investors already heavily exposed to US mega-cap technology through index funds can assess whether additional geographic diversification would reduce portfolio concentration.

What investors can do now: Four practical steps

1. Review existing technology concentration before adding new exposure.

Check how much of your equity portfolio is already invested in US mega-cap technology and AI-related companies, including exposure through index ETFs. Adding China tech may broaden the sources of return, but it also increases total technology exposure.

2. Consider a gradual approach to China tech rather than chasing a sharp rebound.

The recent gains are encouraging, but they follow significant losses. Investors looking to build exposure could consider spreading purchases over time, allowing room for volatility or renewed market weakness.

Broad China internet or Hang Seng Tech ETFs offer one way to gain diversified exposure, while individual stocks allow more selective positioning.

3. Separate established businesses from higher-risk AI themes.

Investors seeking a more established earnings base can examine large internet platforms with recurring revenue, stronger cash flows and shareholder distributions. Those seeking exposure to China's longer-term technology development can explore semiconductors, robotics and AI infrastructure, recognising that these areas may carry greater valuation and execution risks.

For ideas across the opportunity set, explore Saxo's China Tech & AI Shortlist, which highlights stocks and ETFs across China's AI, semiconductor and automation value chains.

The shortlist is a research starting point rather than a recommendation to buy every company included.

4. Watch for confirmation before increasing exposure.

Three signals will be particularly important:

• Earnings: Are profit forecasts stabilising or being revised higher?
• Policy transmission: Are liquidity support and share buybacks translating into stronger market participation and corporate confidence?
• Valuations: Is the recovery supported by improving fundamentals, or are stock prices rising faster than earnings expectations?

A combination of earnings improvement, supportive liquidity and reasonable valuations would provide a stronger foundation for a sustained recovery.

Risks to the view

China's recovery could lose momentum if domestic consumption remains weak, corporate earnings disappoint or policy support proves insufficient. Further US-China technology restrictions, geopolitical tensions or renewed foreign investor outflows could also weigh on sentiment.

Meanwhile, the US AI correction could create opportunities of its own. If valuations become more attractive while earnings and AI demand remain resilient, capital could quickly return to established US technology leaders.

Investors should also remember that Chinese AI companies face many of the same challenges around capital spending, competition and monetisation that are currently troubling US investors.

Bottom line: Two markets, two different investment opportunities

The US AI trade is increasingly being asked to prove its returns, while China's technology sector is being given another chance to rebuild investor confidence.

That does not mean China's technology sector is suddenly stronger than America's, or that the AI investment cycle is ending.

It means markets are becoming more sensitive to the price investors pay, the expectations reflected in valuations and the catalysts that could change those expectations.

For investors, the opportunity may not be about choosing China over the US. It may be about balancing exposure to proven AI growth with selective recovery opportunities where expectations are lower.

The next phase of technology investing is likely to reward discipline over enthusiasm: owning companies with durable earnings, sustainable capital spending and valuations that leave room for things not to go perfectly.