The other AI tech stock rally is in China
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Chinese tech stocks have ripped higher from their April lows, surging over 44% year-to-date, more than double the Magnificent 7 over the same period.
Why it matters: China's tech sector is positioned for more gains given Beijing's efforts to buoy its economy and compete in the AI race, market strategists tell Axios.
What they're saying: "China has a much better hand than people give it credit for," says Jay Pelosky, founder of TPW Advisory, adding, "they're winning."
Zoom in: Pelosky's bull case for China centers around several tailwinds that he says hold "tremendous capacity for another leg up" for Chinese tech.
- Going solo: Beijing is discouraging the purchase of Nvidia chips amid a broader push to "support and home grow its technology in the AI space," Marta Norton, chief investment strategist at Empower, tells Axios.
- AI IRL: As artificial intelligence starts to merge with the physical world, China understands "much better than we do the tie-in from renewables to robotics to advanced manufacturing," Pelosky says.
- Reflation: The Chinese economy is set to reaccelerate as the government works to fight deflation.
- Catching up: Foreign institutional ownership of Chinese tech is low.
Zoom out: Chinese valuations are also attractive. The KraneShares CSI China internet ETF (KWEB) is trading under $42. Its all-time high is $102.
- "You have a lot of corollary companies in China tech vis-à-vis U.S. tech, but they're all a lot cheaper," according to Norton.
Driving the news: China unveiled new restrictions on rare earth exports on Thursday, in what was seen as a move to gain leverage ahead of planned talks between President Trump and Chinese President Xi Jinping later this month.
- This spotlights China's upper hand with trade negotiations, Pelosky says, but it presents a potential risk for investors if talks turn contentious.
- "There's going to be a kind of a rapprochement between the U.S. and China, because we do need their rare earths, and I think they probably would still like to have our Nvidia chips," Pelosky says.
Yes, but: The market consensus remains that the best way to play the AI rally is through U.S. tech stocks. "The U.S. remains the leader on most measures of AI capability," Steve Englander, research head at Standard Chartered, writes.
- U.S. investment into AI is nearly quadruple that of China's, he notes.
- And "many Americans don't like playing China because of concerns about the rule of law and the sense that China has become more of an adversary of ours," Michael Sonnenfeldt, founder of Tiger 21, a network of wealthy investors, tells Axios.
What we're watching: Any thawing in U.S.-China relations could boost market plays on Beijing's tech expansion efforts.
