Investors should remain invested in both China A-shares and Hong Kong-listed equities to capitalise on artificial intelligence (AI) trends despite diverging performance year-to-date.
This is the view of Patrick Ho, chief investment officer, North Asia at HSBC Private Bank and Premier Wealth, who made the case for a barbell approach to Chinese equities in a recent note.
China A-shares as represented by the CSI 300 index have materially outperformed both the MSCI China index and the Hang Seng index year-to-date as China’s mainland stocks outpace their Hong Kong-listed counterparts.
This performance differential reflects the structure of the global AI rally so far, and is amplified by China’s K-shaped economic story, according to Ho.
He said: “For that reason, we currently hold a preference for A-shares over H-shares, driven primarily by A-shares’ much larger exposure to AI-related hardware beneficiaries.”
“Having said that, we believe it is important to be positioned in the full-arc AI opportunity set in China, which means taking exposure to some of the large offshore-listed internet and cloud players as critical enablers of the AI transition and adoption.”
The Hang Seng index has just 7% invested in the information technology sector, although its largest constituents include the country’s Hong Kong-listed cloud giants Tencent and Alibaba.
Whereas the CSI 300 Index has a much larger direct exposure to a diversified group of technology stocks, with almost a third (31%) of its constituents in the information technology sector.
As part of a “barbell” investment strategy, Ho said “it is important to stay invested across the entire AI ecosystem” despite having a preference for A-shares over H-shares.
He said: “Key A-share tech benchmarks (ChiNext and STAR50) provide concentrated exposure to AI hardware and industrial value chains that stand to benefit directly from accelerating global AI capex.”
“That said, large Hong Kong-listed tech stocks provide deeply discounted entries into the AI monetisation layer and complement the onshore listed AI hardware names.”
“While they have been under pressure due to margin challenges in their traditional business (i.e., e-commerce and food delivery) and regulatory headwinds, low valuation means some of their market-leading model/cloud business has become somewhat a ‘free option’.”
A bifurcated Chinese economy
The backdrop for investing in Chinese equity market is one that is becoming increasingly bifurcated as policymakers champion local AI development while its consumption, property and discretionary spending act as a drag on its economy.
This K-shaped bifurcation could be deepening even further, according to Ho.
“The upper arm of the K — AI compute, semiconductors, and advanced equipment and hardware — is expanding rapidly, fuelled by policy support, export-driven demand and domestic substitution,” he said.
“The lower arm — consumption, property, and discretionary spending — remains structurally impaired. The splits map directly onto equities.”
He pointed out that the rally in AI stocks has been concentrated in AI hardware enablers such as semiconductors, advanced packaging, optic modules, and AI servers – where A-share listings dominate.
This contrasts sharply to H-share technology names such as China’s large internet platforms and AI application adopters which are being dragged by consumption weakness, regulations and a near-term capex overhang, Ho noted.
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