Morgan Stanley analysts say growing excitement over China’s AI progress is lifting investor sentiment, especially after the launch of the DeepSeek AI model. But they warn that broader economic challenges, like weak inflation and sluggish growth in non-tech sectors, are still a concern.
Since mid-January, China’s Shanghai Shenzhen CSI 300 index has risen 2.2%, while Hong Kong’s Hang Seng index jumped 13.5%, mainly driven by tech stocks. Morgan Stanley expects this gap between tech and traditional industries to continue, as deflationary pressures weigh on non-tech sectors.
The rally in Chinese tech stocks picked up after DeepSeek R1’s release. The AI model reportedly competes with OpenAI’s offerings despite using older hardware and a smaller budget. More AI breakthroughs from China’s top internet firms have strengthened optimism that the country can stay competitive, even with U.S. restrictions on advanced tech exports.
This renewed confidence in China’s AI industry is driving gains across multiple sectors, including technology, utilities, and energy. But Morgan Stanley analysts say market performance will depend on factors like geopolitical shifts, domestic stimulus, and how fast AI spreads across industries.
Meanwhile, reports suggest Beijing is working to stabilize ties with Washington by positioning itself as a mediator in the Russia-Ukraine conflict. These diplomatic efforts could influence China’s economy and investor sentiment in the coming months.
