The artificial intelligence (AI) wave initiated by DeepSeek has sparked a renewed interest among global investors in the Chinese technology market and investment opportunities within the AI sectorThis shift in perception marks a significant turning point for those previously hesitant about entering this rapidly evolving industry.

Historically, financial institutions like Morgan Stanley held a cautious stance towards the Chinese stock market, largely due to uncertainties surrounding trade tariffs and declining profitsYet, their latest report reveals a change in strategy. "Investors are gradually realizing that China’s advancements in AI may not rely heavily on massive capital investmentsEven with constrained supplies of high-end GPUs, there exists the potential to narrow or even close the technological gapThe focus of competition between China and the United States has shifted from trade tariffs to high-end manufacturing, and now it is increasingly centered on AI, prompting a fundamental change in investment logic," explains Yang Wang, Chief China Equity Strategist at Morgan StanleyHe further highlights the advantages that could propel China's AI evolution, including a vast reservoir of engineers, abundant data resources, a mature social media and e-commerce ecosystem, and potential government policy support.

Recent dialogues among investors suggest that this shift in investment mentality may have lasting implicationsIt appears to be driving a fundamental investment approach rather than merely reactive trading to fluctuations in government stimulus policiesThe intensity of this AI and technology-driven market momentum is evident, with related stocks in Hong Kong and among Chinese companies listed in the U.S. experiencing significant rallies; for instance, the Hang Seng Tech Index surged around 25% from its low earlier this year, nearing levels seen last October following stimulus-driven spikesNotably, Alibaba's Hong Kong shares climbed over 8% on February 12th.

As funds flow south into Hong Kong's AI sector, the recent performance of the stock market in the region reflects a robust bullish trend

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Some of the most sought-after AI stocks, stemming from Chinese cloud computing and internet firms, are primarily offered in Hong Kong, while others concurrently list in the U.SThis trend has led to a technical bull market in Hong Kong, defined as a 20% increase from recent lows.

MsMimi Miao, head of Greater China equities at Janus Henderson Investors, remarked on how DeepSeek significantly enhances computational efficiency, rendering AI applications more cost-effective and broadly accessibleThe emergence of DeepSeek is reshaping industry standards for efficiency and innovation, which carries substantial implications for global investors particularly focused on AI's future development.

Investment managers from various overseas asset management firms have indicated that while long-term international funds necessitate an extended evaluation period and have yet to act, they are undeniably showing increased interestIn contrast, capital from mainland China has already begun to make moves ahead of this waveData supports this, highlighting that since the beginning of the year, there has been a robust net inflow of approximately $17 billion towards southern investments, predominantly flowing into the IT and communications sectors.

To break down the specifics, the IT sector has accounted for 17% of total net inflows, compared to a mere 8% from the previous yearMeanwhile, communications services captured a staggering 38%, a significant rise from just 14% the year beforeSince 2025, net daily inflows in IT and communications have reached $1.48 million and $3.32 million, respectively, showcasing a palpable appetite among investors within these sectors.

In contrast, Morgan Stanley's data as of January 31 indicates that globally, long-term capital allocations in IT and communications services remain markedly low, suggesting a compelling opportunity for reallocation. "The reduced trading days due to the Spring Festival, along with the new trading thresholds imposed by mechanisms such as the Stock Connect, indicate that global investors might exhibit even lower allocations toward relevant A-share stocks

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Moving forward, overseas investors may revisit opportunities within the A-share space," says Wang.

Alibaba’s impressive 8% spike has become a rallying point for ongoing enthusiasm in the marketAccording to Morgan Stanley, industry trends suggest AI’s monetization path unfolds over three core stages: the foundational support layer (like semiconductors), the infrastructure layer (comprising computing power and data centers), and the application layer (focusing on ToB and ToC AI products). The advent of DeepSeek technology is expected to lower the costs associated with AI training and inferences, thereby expediting AI applications’ proliferation.

Presently, companies involved in AI foundational infrastructure and early applications are likely to reap the most benefitsIn China, AI applications in consumer sectors (To C) are projected to monetize faster than those aimed at businesses (To B). Based on thorough analyses from bottom-up analyst assessments, the firm has identified fifteen tech companies that stand to gain significantly, with eleven from the IT sector, three from communications services, and one from consumer discretionary sectors.

Industry stalwarts like Alibaba and Tencent are positioned as front-runners in this AI surgeOn February 12, the remarkable rise in Alibaba's shares was significantly attributed to investors recognizing cloud services—as exemplified by Alibaba Cloud—as pivotal infrastructure supporting this tech transformationAdditionally, reports have surfaced speculating a cooperative venture between Apple’s AI ecosystem, dubbed Apple Intelligence, and Alibaba.

Morningstar’s senior equity analyst, Chelsey Tam, expressed that the potential partnership between Alibaba and Apple somewhat validates Alibaba's capabilities in the AI domain and its prowess in products like Tsinghua Tongfang's Tsinghua AI modelChoosing apt partners to deliver an exceptional Apple Intelligence experience is anticipated to aid Apple in revitalizing iPhone sales within China.

Institutional perspectives remain optimistic despite the absence of detailed cooperation agreements, recognizing that Alibaba’s collaboration with Apple could set a benchmark for the industry, potentially opening up avenues for other firms to express interest in forming partnerships.

The anticipation surrounding Alibaba’s future is buoyed by the soaring demand for AI computing resources amplifying its cloud infrastructure business, a crucial segment of Alibaba's operations

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Speculations regarding Alibaba Cloud’s independent IPO continue to surface, further showcasing investor confidence in its potential growth trajectory.

As DeepSeek rises, the demand for AI model training and inference intensifiesGiven the substantial computing resources necessary for AI model training and deployment, the leading cloud service providers in China are poised to benefit from this rapid evolution in the sectorAlibaba Cloud, which has developed proprietary AI chips dubbed “HanGuang,” offers high-end GPU cloud services from NVIDIA, positioning itself as a top choice for AI enterprisesMany Chinese firms aiming to build AI models will likely opt for Alibaba Cloud’s scalable computing resources instead of investing in independent data centers.

According to reports from a senior analyst at an overseas stock research institute, “Currently, U.S. stock valuations appear generally elevated, while the fundamentals of Chinese tech stocks are not as poor, revealing an opportunity for a valuation re-rating.” The sustained rise of large models in China and the emergence of more applications are expected to transform cloud services into a cornerstone of the sector.

Despite the apparent excitement within specific tech stocks, a broader “bull market” has yet to solidify amidst the backdrop of ongoing macroeconomic challengesThe market is witnessing pronounced divergences between AI/technology stocks and those outside these realmsLooking ahead, attention should be concentrated on the macroeconomic landscape, particularly developments in consumer recovery, the potential influence of future stimulus policies, and the dynamics of geopolitical risks.

Wang highlights that excluding components from the Hang Seng Tech Index, a tailored version of the index has remained relatively stable, showcasing only a 3% increase since the year began, indicating that recent index growth can be largely attributed to AI and tech stocks, while other sectors remain relatively subdued.

In the short term, she predicts continued market disparity, as deflationary trends are still curbing consumer performance and traditional industries

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