By TAOSHA WANG
US equity markets are facing severe headwinds in early 2025, while Chinese equities rally, leaving global investors – structurally underweight China since 2021 – scrambling to adjust. This divergence underscores a critical question: Are Chinese stocks an effective hedge against fading US exceptionalism?
US equities have climbed relentlessly in recent years as China has languished in a bear market, prompting existential debates about the latter’s “investability.” In early 2025, the roles have reversed.
The benchmark US S&P 500 index is down over 4.0 percent this year, while Hong Kong’s Hang Seng Index (HSI) – where many major Chinese companies are listed – tops global equity year-to-date (YTD) performance charts with a 19.6 percent gain as of March 14.
Chinese stocks historically have exhibited low correlation with US markets: 0.49 versus 0.76 with Europe. So this year’s performance divergence is not extraordinary.
But the current dynamic is distinct because it is being driven by a dramatic shift in technological and macroeconomic trends.
The technology sector has long been a cornerstone of earnings growth in the US with artificial intelligence recently emerging as the latest crown jewel. However, China is catching up in the AI tech race.
Nasdaq’s trillion-dollar selloff following the unveiling of DeepSeek’s cost-effective R1 model likely marks a watershed moment.
The threat is not just competition from a cheaper, equally-capable Chinese alternative, but the rise of open-source AI frameworks, which offer a direct challenge to the proprietary models of dominant US firms like OpenAI.
This commoditization of AI models, and cutting-edge technology in general, erodes the “moats” that once justified sky-high valuations for US tech giants, and raises questions about Silicon Valley’s “spend-first” approach to AI investments.
China’s tech sector, often seen as a fast follower, is now poised to leapfrog the US in innovation.
Top Chinese AI apps now collectively boast 100 million daily active users (DAU). While still behind ChatGPT’s 150 million DAUs, these firms are closing the gap rapidly.
DeepSeek and its open source variants are also gaining a loyal customer base in the sciences, where researchers value transparency, logical rigour, and cost-efficiency.
If history is any guide, the next stage of AI development will focus on commercial applications. Chinese firms have a proven track record in commercialization.
They have led the world in mobile payments, for example AliPay, and super apps like WeChat, which integrate messaging, payments, e-commerce, and social media.
