DeepSeek keeps boosting Chinese tech stocks. Goldman Sachs says this upswing could be different.

Hong Kong's stock market has been on a AI-fueled tech rally recently.

Vernon Yuen/NurPhoto/Getty Images

• DeepSeek's AI model integration into Weixin boosted Tencent's stock on Monday.
• Gaming giant Tencent's gains came after outsized gains in Alibaba and Baidu shares last week.
• Chinese tech stocks have rallied hard recently on the back of the hype in DeepSeek's cost-effective AI model.

Chinese artificial intelligence startup DeepSeek keeps setting the country's tech stocks on fire.

Hong Kong's Hang Seng Tech Index is about 25% higher so far this year, underscoring the strong gains for Chinese tech firms. Meanwhile, the broader Hang Seng Index is about 13% higher this year.

The enthusiasm in Chinese tech shares is prompting questions about whether the rally is sustainable, given China's prolonged economic downturn. An aggressive stimulus blitz in September prompted a surge in the Chinese stock markets — but that fizzled out in weeks.

But it could be different this time, analysts at Goldman Sachs wrote in a Monday note. DeepSeek R-1 — the AI company's newest flagship model, which is seen as globally competitive and cost-effective — has "altered the narrative" of China tech, they wrote.

While Beijing's September policy pivot reduced the downside risks for stocks, recent technology breakthroughs are better for valuations and earnings because they are more "micro- and innovation-driven in nature," wrote Goldman's analysts.

That "might give the recovery more staying power than those that were purely driven by policy news and expectation repricing," the analysts wrote.

The recent rally is a reversal of fortune for Chinese tech firms. In recent years, the companies were battered by Beijing's crackdown on Big Tech, but now they seem to be taking turns to post outsize gains. Last week, it was Alibaba and Baidu.

On Monday, gaming giant Tencent's turn came. The stock gained nearly 8% — to their highest level since 2021 — after the company confirmed it was integrating DeepSeek's AI model in its Weixin super app. The stock closed 4% higher in Hong Kong.

The analysts at Goldman Sachs wrote that Chinese companies could see a boost in earnings from three main AI-driven areas: productivity gains, cost savings, and new revenue opportunities. A confidence boost could also raise the fair value of Chinese shares by 15% to 20%.

The technology may attract $200 billion of net buying for Chinese stocks, the analysts wrote.

Despite the optimism, the Goldman Sachs analysts highlighted risks to the current rally, including issues like data privacy, industry regulation, the intensification of Western export controls, and China's broader economy.

"As promising and strategically important as AI could be to China's long-term growth outlook, we'd emphasize that forceful policy delivery, notably fiscal stimulus, is necessary to soften the immediate tariff headwinds," they wrote. Challenges include boosting domestic demand and overcoming the disinflationary spiral.

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