[Contribution] Demystifying Chinese tech equities’ lagging performance

By Raymond Cheng

While global tech rides an unprecedented AI-driven supercycle to historic highs, the Hang Seng Technology Index tells a starkly different story of disconnect.

Driven by soaring AI capital expenditure, the MSCI World IT Index has surged over 20 percent year to date, whereas HSTECH has slumped with a negative return.

Understanding the structural and macroeconomic forces behind this glaring divergence is critical to determining whether China’s technology sector represents a genuine catch-up trade for the remainder of the year.

One key driver behind the outperformance of global equities this year relative to other asset classes has been AI capital expenditure. We recently made an upward revision to our AI capex growth forecast for 2026 from 54 percent to 65 percent. Naturally, the rising capex has translated into better earnings prospects for AI compute hardware and infrastructure. This upstream segment of the technology spectrum has understandably become the top-performing segment within technology equities this year.

Meanwhile, the share price performance of hyperscalers — the big investors behind the rapidly growing AI capital expenditure — has varied widely, tethered to the progress of their monetization of such investments. Software stocks have also fallen victim to the fears of AI disruption. This performance divergence within the tech spectrum underpins why the US’ tech-laden Nasdaq Composite year-to-date return of around 15 percent has been surpassed by semiconductor-focused South Korea and Taiwan equities, which have vaulted up over 100 percent and 50 percent, respectively.

While its global peers bask in the glow of upstream AI compute hardware and infrastructure, HSTECH finds itself in a very different structural position.

HSTECH is heavily weighted toward AI adopters but structurally light on upstream AI infrastructure. Less than 20 percent of the index is geared toward AI compute hardware, semiconductors and server infrastructure. Conversely, over 50 percent of the index comprises application-focused internet giants across social media, e-commerce and food delivery platforms, while electric vehicle manufacturers account for another 15 percent. These consumer-facing sectors have been dragged down by muted domestic consumption, tapering subsidies and intense price competition in China. The heavy representation of these underperforming segments dwarfs the impressive 50 percent+ average returns registered by the index’s few upstream hardware constituents.

The lopsided index architecture begs the question, “Where exactly are the listed Chinese AI compute stocks?” Many of them trade on the A-share market, specifically Shenzhen’s ChiNext, China’s Nasdaq, or the Shanghai Stock Exchange’s Star Market. This is partly because of regulatory requirements and the industry’s strategic importance. Year-to-date returns of over 30 percent and 26 percent for the Star 50 and ChiNext, respectively, illustrate that China’s domestic AI compute segment has notched gains that are fairly comparable to those of other markets. Access to these A-shares, however, remains restricted, as they cannot be traded directly by non-mainland Chinese individual investors.

Fortunately, this geographical constraint has begun to ease as Hong Kong saw the first IPO of a Chinese AI GPU chipmaker in January this year. Using this stock as an example, the share price has exceeded three times the IPO price within months, signalling stellar returns for a direct beneficiary of China’s grand AI capex and chip self-sufficiency push. Yet, despite having been traded for months, this stock has not met the stringent criteria for inclusion on HSTECH, including trading history and the fast-entry market capitalization cutoff rule.

That said, starting in June 2026, two pure-play Chinese AI stocks will be added to HSTECH after meeting the fast-track inclusion criteria. They are estimated to account for a total initial weight of 5-7 percent of the index, which is projected to rise to nearly 10 percent over time.

The upcoming inclusion of the first batch of pure-play AI constituents on 8 June marks a structural pivot for HSTECH. This transition promises to diversify the index away from its traditional concentration in e-commerce and EVs toward the expanding AI ecosystem. We expect AI-related constituents to scale up to 40 percent of the index weight within the next 12 months.

Assuming risk-on sentiment is sustained by an expected gradual reopening of the Strait of Hormuz, this evolving market environment would accelerate Hong Kong’s AI pipeline, which accounts for over 40 percent of its upcoming IPOs. Crucially, several of these IPO candidates are high-profile carve-outs from internet platform giants. Their successful listings will also unlock value within parent companies, which are already major HSTECH constituents, and trigger a broader index re-rating.

From a valuation standpoint, HSTECH remains compelling, trading at 18 times forward 12-month earnings against an anticipated earnings growth rate in excess of 30 percent. Infusing the index with higher-growth AI exposures will likely strengthen forward earnings visibility and drive multiple expansion.

Furthermore, we expect the semiconductor-driven tech rally to broaden as downstream industries adopt and successfully monetise AI, unlocking new revenue streams and accelerating earnings growth. Supported by regulatory intervention to curb destructive price wars in China, the worst is probably behind the EV and e-commerce sectors. Those index heavyweights that execute efficiently on these dynamics are well-positioned to drive a powerful earnings recovery from troughs.

Of course, a shadow remains. Recent economic data highlights continued caution among Chinese consumers, with April retail sales rising just 0.2 percent year-on-year. While this domestic weakness poses an overarching challenge for consumer-reliant equities, export volumes for big-ticket items, such as EVs, may surprise on the upside, fuelled by elevated global oil prices and capacity expansion in prior years.

Strong external demand is well-poised to offset soft domestic consumption, bridging the gap while these consumption-related constituents gradually compress in index weight to make way for higher-growth, pure-play AI stocks.

Ultimately, HSTECH’s impending structural transformation makes its current valuation gap look less like a permanent discount, and more like an interesting catch-up opportunity.

Raymond Cheng is chief investment officer for North Asia at Standard Chartered Bank’s Wealth Solutions unit. Views in this column are his own. — Ed.

jwc@heraldcorp.com