DeepSeek Drives Double-digit Chinese Stock Rally as Investors Pull Out of India

Key Takeaways

• Chinese equities have become the most heavily net-bought market in 2025.
• DeepSeek’s AI breakthrough has accelerated an investment shift from India to China.
• Despite the rally, concerns remain over trade war risks, China’s financial system, and real estate instability.

As confidence in China’s tech sector surges thanks to its recent breakthroughs, capital is shifting away from other emerging markets—most notably India—toward Chinese equities.

Goldman Sachs reports that Chinese stocks are now the most heavily net-bought assets in its prime brokerage book, with hedge funds accelerating their purchases at a pace not seen in months.

However, while the rally gains momentum, some analysts warn against geopolitical and economic risks that could temper enthusiasm.

Funds Exit India, Pile Into China

The rotation from India to China is clear in the numbers.

The Hang Seng Tech Index has hit a three-year high, while the MSCI India Index has dropped more than 7% this year.

India’s economy is showing signs of weakness. GDP growth slowed to 5.4% in Q3 2024, marking its lowest level in seven quarters. The government has also lowered its fiscal-year projection to 6.4%, the weakest in four years.

As a result, global funds are cutting exposure to Indian equities.

A Nomura survey found that the percentage of emerging market funds overweight in China and Hong Kong increased, while those underweight in India rose by 6%. Over half of the surveyed funds reduced their allocations to Indian stocks while increasing exposure to China.

DeepSeek’s AI Sparks a Tech Rally

Analysts highlight China’s AI advancements, including DeepSeek’s R1 and Alibaba’s Qwen 2.5, are driving the shift.

The MSCI China Index has climbed 27% from its January low. According to Goldman Sachs, hedge funds purchased more Chinese equities in early February than in any week since October.

The enthusiasm for China’s stock market comes amid economic uncertainty and escalating trade tensions. U.S. tariffs continue to pressure manufacturers and exporters, while Beijing’s countermeasures threaten American importers.

Still, rising share prices reflect investor hopes for tariff relief and excitement over China’s AI advancements.

Analysts Urge Caution

Despite the optimism, not everyone is convinced the rally is sustainable. Analysts warn of lingering risks , including:

• Ongoing U.S.-China trade tensions that could disrupt supply chains.
• Structural weaknesses in China’s financial system that remain unaddressed.
• Instability in the real estate sector, which continues to weigh on economic growth.

While DeepSeek’s AI-fueled rally has shifted investor focus to China, the long-term sustainability of this trend remains uncertain. As markets adjust, investors will need to weigh the risks before making long-term bets on China’s economic resurgence.