Edmund Shing
Hello and welcome to another podcast from BNP Paribas Wealth Management. I'm Edmund Shing, Chief Investment Officer. The subject of this podcast is Chinese Technology stocks - why we think they're more attractive than the US Magnificent seven at this point.
Let's rewind to the beginning. Up until 2021, Chinese technology stocks had enjoyed a very, very strong run-up, similar to the run-up seen in US technology stocks post the Covid lockdowns and re-openings. And this was largely driven, of course, by e-commerce because e-commerce had boomed during the lockdowns, not only helping companies such as Amazon in the US, of course, but also companies such as Tencent and Alibaba in China.
Now after this huge run-up, we then had a huge collapse. If we look between 2021 peak and 2022, the trough for Chinese technology stocks represented by the Hang Seng Technology Index, we saw a huge correction over this 1+ year period, a fall of 73% from peak to trough, which was huge, much bigger even than for US tech stocks.
You know, really, I think we can say that investors, both local domestic investors in China and foreign investors definitely swore off Chinese equities and technology stocks in particular and just said “I don't want anything to do with them” and really have just ignored them and excluded them from their investment portfolios, to a large extent.
And this has been a mistake because from the mid-2024 low, the Hang Seng Technology Index with companies such as Alibaba, Tencent, BYD, Xiaomi and others, had actually risen from the sort of mid-2024 lows by 91%, still far from the 2021 high, however, but still nevertheless a very strong performance over the last year and a bit. If we were to take simply the performance of Chinese technology stocks over this year to date, 2025, since the 1 January, the Hang Seng Technology Index has risen 45%, far outstripping the Magnificent Seven or the Nasdaq 100. Nasdaq 100, for instance, only rose 16% over the same period in dollars. So a far superior performance from Chinese technology stocks.
Now, the question, of course, is always the same. Is it over? Can it continue? I think it can continue. For one thing, we're seeing very strong interest from domestic investors. And this we can partly measure looking at the southbound flows of money from China to be invested in the Hong Kong listed stocks, such as, as I said, Alibaba and Tencent. These southbound flows have been huge over the last few months. There is no sign that they're slowing down. So clearly, domestic sentiment remains very strong towards the technology sector. And I think this is merited ever since DeepSeek released their large language model to compete with the Americans, obviously, the ChatGPTs of this world.
And of course, we've had models from Baidu, from Alibaba which have also been fairly impressive on, again, much lower levels of investment than has been put into AI by the likes of Meta, Google, Amazon and so on.
Now, on top of that, valuations are still much more reasonable for Chinese tech stocks than for the Magnificent Seven. The Magnificent Seven trade on average at well over 30 times forecast PE, with certain companies such as Tesla trading at well over 100 times forecast PE, so really very stretched valuations. The Hang Seng Technology Index, in contrast, is roughly even after the 91% rise since mid-2024, it's still only trading at about 21 times forward PE. So again, a big 35% discount roughly to the Magnificent Seven.
So valuations are much more reasonable. And let's face it, if we look at Chinese positioning in the broader technology space, they're not just talking about AI but for instance, talking about other areas of technology where China has invested heavily over the last 20 years. We can think of batteries, electric vehicles, solar panels, robotics.
And I think robotics will be the next level of physical AI. So this will be the next wave of AI. It won't just be large language models, but it will be in humanoid robots. And China, together with South Korea and Japan are clearly the leaders in the components required for these humanoid robots. We can also think about e-commerce and of course digital payments. Now in these areas as well, Chinese companies in many ways are far ahead of their Western counterparts in terms of their sophistication. And so really, I would say there is a lot to be said for still investing in China today.
Again, coming back to foreign investors, they're still very wary of China and of Chinese stocks because they got their fingers burnt in 2021 and 2022, and they have not really returned in large numbers to invest in China and Chinese technology. But I think there is a good reason to do so. If we look at Chinese research and development spending as a percentage of GDP, it far exceeds that of the US and that of any European country. So again, China is putting its money where its mouth is, investing in a broad swathe of technologies.
If we look at patent and research papers written and cited, again China has exploded in terms of the number of patents being issued for technology and also the academic papers being written and cited. So, again, that research and development effort can also be seen in the academic sphere as well as in the industrial sphere.
So I think to sum up, is it too late to invest in Chinese stocks, in particular Chinese technology? I think the answer is no. Yes, they have run up and maybe 21 times, they are not as obviously cheap as they were. But I still think there is a good argument for buying Chinese technology exposure today. And you can do this in many ways, using of course a variety of funds or ETFs that specifically invest in the Chinese technology sector or indeed in the Hang Seng Technology Index. And there are plenty of solutions there for European and international investors to choose. So I would say it's not over. There is more to go. And in many ways I would say that it's the foreign investor that can really push the stock market in China and in Hong Kong quite a bit higher.
Again, if we abstract away from the Hang Seng Technology Index, and look at the Hang Seng China Enterprise Index (HSCEI), these are mainland Chinese listed companies quoted in Hong Kong, those companies which include, of course, banks and industrial companies and consumer companies, that index trades at a really rather cheap PE of 11 times. So the technology stocks 21 times, trading at a big discount to the American counterparts. But China stocks overall, quoted in Hong Kong ,are trading 11 times. So there really are just basically outright cheap still despite the strong performance so far this year.
So I think there is an argument for investors to look at their allocation to Chinese stocks and to increase it in spite of the fact they got burnt in 2021 and 2022. And I think the focus really should be in Chinese technology. If you want to buy into AI, and particularly the next wave of AI around humanoid robots, remember AI large language models may help build the brain. But then there's the rest of the humanoid robot. All the components, servers, motors, that you need and it's in this type of industrial automation where China, together with South Korea and Japan, are world leaders.
And so I think if you want to invest in the next wave of AI, physical AI via humanoid robots, you really should take a very close look at China. And I think that's even before we start talking about self-driving vehicles. We know that electric vehicle penetration from BYD, Xiaomi and others, not only in China but across the world, is increasing rapidly. And I think it won't be long before they're able to have full self-driving. And I think that also will be a revolution in personal transport and something that we should be investing in now.
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