DeepSeek triggers a frenzy of AI investments in China, is the Hong Kong A-share market aiming to replicate the "crazy bull market" of 2023 in the US stock market?

Due to the release of DeepSeek, a large open-source AI model comparable in performance to OpenAI GPT-3 but with much lower training and inference costs, global investors have become extremely bullish on Chinese internet companies and leaders in the semiconductor and software industries, leading to a "technical bull market" in the Hang Seng Tech Index, the benchmark index for Chinese technology stocks traded in the Hong Kong stock market. In the A-share market, the ChiNext Index, which includes many technology stocks, surged by over 3% at Friday's midday close, with a weekly gain approaching 7%. The index had been in a long period of consolidation since October, but recently saw a significant rebound following the excitement around DeepSeek's impact on Chinese tech stocks. The Hang Seng Tech Index rose by 2.79% at the midday break, with gains exceeding 20% from its January low. Xiaomi, Lenovo, and NIO were the main technology companies driving the index higher on Friday. It is worth noting that the index has shown high volatility, having recently fallen deep into "technical bear market" territory. Despite the recent rebound, the Hang Seng Tech Index is still over 50% below its peak at the beginning of 2021. In the Hong Kong stock market, the optimistic sentiment for a "long bull market" is even more fervent than in the A-share market. Benefiting from the Fed rate cuts and domestic monetary stimulus, Hong Kong stocks are enjoying a "dual liquidity dividend" from China and the U.S., with foreign investors rushing into Hong Kong as a gateway to invest in Chinese companies. This has attracted hedge funds and asset management institutions to flock to the Hong Kong stock market. The unprecedented "AI boom" in the Hong Kong and A-share markets sparked by the emergence of the DeepSeek R1 large model has helped alleviate negative concerns about the 10% tariffs that the U.S. imposed on Chinese imports. Traders have noted that Chinese tech stocks (including those in the Hong Kong and A-share markets) have performed well in the background of lower-than-expected U.S. tariffs and China's precise and targeted response. Will the 2023 U.S. "crazy bull market" be the script for the Hong Kong and A-share markets? With such hot sentiment, it is reminiscent of the "AI craze" in 2023 caused by ChatGPT's global popularity and the AI investment frenzy sparked by NVIDIA's unparalleled financial reports, which subsequently drove the 2023 insane bull market in the U.S. Stock market. In that year, the S&P 500 index surged by 25%, while the NASDAQ 100 index, known as the global technology benchmark, skyrocketed by 55%. The 2023 U.S. crazy bull market was dominated by Wall Street investment banks such as Goldman Sachs, as well as numerous leveraged hedge funds. Looking at the current trends in the Hong Kong and A-share markets, with domestic liquidity support policies and fiscal stimuli, combined with the AI investment frenzy caused by DeepSeek, the bullish market sentiment and enthusiasm of Asian investors are comparable to the unprecedented AI boom that drove the U.S. "crazy bull market" in 2023. As a non-strict benchmark, the CSI 300 Index, which covers almost all Chinese core assets, is sometimes compared to the S&P 500 index of core American assets, the STOXX Europe 600 index, and the Nikkei 225 index, collectively constituting the so-called "global core assets". The CSI 300 Index ranks second in terms of size and influence after the S&P 500 Index. Meanwhile, the Hang Seng Tech Index, which includes Chinese tech giants such as Alibaba, Tencent, and Baidu, has earned the reputation as the "Eastern NASDAQ" and is sometimes compared to the NASDAQ 100 index, which includes American tech giants such as Apple, NVIDIA, Microsoft, and Google. As these Chinese tech giants continue to grow in performance and market value, the future "Hengke Index collective" may become the NASDAQ 100 index. After experiencing a wave of shocks from DeepSeek, Goldman Sachs reaffirmed its bullish sentiment on the Chinese stock market. Based on a neutral forecast, Goldman Sachs expects the MSCI China Index to rise by 14% to 75 points this year, while under an optimistic scenario, the index could soar by 28%. Goldman Sachs emphasizes that stocks in the "soft tech" sector are expected to outperform the overall market. The MSCI China Index includes core Chinese assets such as Alibaba, Tencent, Kweichow Moutai, and China Yangtze Power, currently hovering around 67 points. When Alibaba and Tencent present themselves as providers of cutting-edge AI models, powerful cloud AI computing systems, and complete AI application software development platforms, with these labels gradually penetrating various industries in China, the market size in the future has the potential to rival that of Amazon AWS and Microsoft, leading to a similar investment boom as seen in the global funds flowing towards North American cloud computing giants from 2023 to 2024. The new AI model technology route led by DeepSeek, focusing on "low cost" and "high energy efficiency," is expected to bring about a general decline in the overall cost of the AI industry chain. For Chinese tech companies focusing on AI applications, such as internet giants and consumer electronics companies, the accelerated penetration of AI applications into various industries in China will lead to significant market opportunities and a much larger demand for AI computing power on the application and inference side. If killer-level AI application software/AI agents begin to emerge on a large scale from 2025 onwards, it will be a major boon for cloud giants such as Alibaba, Tencent, and JD.com. These AI software platforms, whether in the early stage AI software developer ecosystem or the massive cloud AI inference resource on the later stage, rely heavily on the powerful computing platforms provided by these cloud giants. These cloud giants are focusing on the development of B-end and C-end AI application software ecosystems related to generative AI, aiming to significantly reduce the technical barriers for non-IT professionals in various industries to develop AI applications. From Janus Henderson Investors in Singapore.RS's portfolio manager Sat Duhra said, "This is a long-neglected industry, but like other purely domestic industries, there are still many bright spots. The recent shocking release of DeepSeek reminds us that behind the scenes, China's industrial policies, such as 'Made in China 2025', are driving many industries towards world-class levels."Deutsche Bank calls for the disappearance of China's market valuation discount, and 2025 may usher in a "Sputnik moment" Since the release of the open-source AI large model DeepSeek, which performs on par with o1, Chinese internet giants and other technology companies have become emerging threats in the American AI field. Despite facing restrictions in importing advanced chips from Western countries, the development cost of applications utilizing DeepSeek is far lower than that of American competitors. This release caused the market value of the "AI chip hegemon" NVIDIA to evaporate by over $500 billion in a single day. Recently, the AI engineering team from China's DeepSeek created the DeepSeek R1 large model, which has dominated the hot searches in the United States and continues to top the free app download rankings in the Apple App Store in both China and the United States, surpassing ChatGPT on the US download chart. The DeepSeek team has proven that they can train breakthrough open-source AI models with exceptional reasoning capabilities using low-cost AI accelerators and without access to the top AI GPUs from NVIDIA. With an investment of less than $6 million and using 2048 chips with performance far lower than H100 and Blackwell's H800 chips, the DeepSeek team has created an open-source AI model that rivals OpenAI o1 in performance. Compared to the training costs of Anthropic and OpenAI, which reach up to $1 billion, DeepSeek's inference input and output token pricing compared to OpenAI pricing can be described as a "bone-breaking" discount. As the "DeepSeek low-cost AI model computing power storm" from the East sweeps across the globe, investors are starting to question the rationality of American tech giants' extravagant AI spending plans. The fact that these giants are spending billions of dollars, compared to DeepSeek's mere million-dollar level of costs, has left these American tech investors both shocked and furious. Due to investors' concerns that the paradigm of "low-cost AI large models computing power" led by DeepSeek will significantly reduce AI GPU orders for tech giants in the short to medium term, NVIDIA's stock price plummeted by nearly 17% last Monday, resulting in a market value evaporation of $589 billion, the largest in US stock market history. Upon DeepSeek's emergence, traders on Wall Street generally have a bullish view of the Chinese stock market, believing that as Chinese tech companies gain recognition in global competitiveness, the "China discount" will completely disappear, and the market indices are expected to surpass historical highs. Deutsche Bank analyst Peter Milliken stated in a report released on February 5th: "We believe that 2025 will be the year in which the global investment community recognizes China's superior competitiveness over other countries. In 2025, China released the world's first sixth-generation fighter jet and its ultra-low-cost, high-performance open-source AI large model, DeepSeek." The latest report from Deutsche Bank focuses on the core concept of "China's Sputnik moment," arguing that China's technological innovation has triggered a "cognitive leap" globally. Marc Andreessen, a Silicon Valley investor, even referred to the release of DeepSeek as the "Sputnik moment of AI," symbolizing the undeniable rise of Chinese technology. (The Soviet Union successfully launched the world's first artificial satellite, Sputnik 1, in 1957, and the "Sputnik moment" has since become a symbol of a significant shift in the global competitive landscape). The report predicts that 2025 will be the year in which global investors re-evaluate the Chinese stock market. From textiles, steel, and electronics to the rapid rise of new energy vehicles, nuclear energy, high-speed rail, and artificial intelligence (AI) in recent years, Chinese companies have demonstrated strong global competitiveness. The market is expected to reevaluate the "China discount" and drive Chinese A-shares and Hong Kong stocks into a long-term bull market. Deutsche Bank forecasts that the Chinese stock market will enter a long-term bull market in 2025, with Hong Kong and A shares becoming focal points for global investors. Especially against the backdrop of uncertainties in US Federal Reserve policies, the decline of manufacturing in Europe and the United States, and the decreasing competitiveness of Western companies, global funds may redistribute into the Chinese market. HSBC stated that as foreign capital inflows continue to increase and China's technological innovation capabilities are increasingly recognized globally, the valuation gap between the Chinese stock market and other emerging markets may narrow. Over the past 24 months, most of the gains in the Nasdaq 100 index have come from a few tech giants, leading to inflated valuations and high market concentration. As a result, the forward P/E ratio of this tech-dominated benchmark index is as high as 27x, surpassing its 10-year average, while the forward P/E ratio of the Hang Seng Tech Index is only 17x. However, there is also a sense of caution on Wall Street towards the Chinese stock market. Morgan Stanley's strategy team reiterated their cautious stance on Chinese semiconductor and hardware stocks in a report on February 1, citing tariffs and other risks, including the possibility of the US government expanding restrictions on the sale of advanced chip systems to China. According to a report by Bloomberg Intelligence strategist Marvin Chen, there was a slight increase in Southbound funds in January, with domestic investors heavily buying tech stocks in the Hong Kong market. With DeepSeek triggering an AI investment frenzy in China, this trend of capital inflow may continue.