Can China tech stocks be boosted by DeepSeek?

As far as the stock market's response is concerned, DeepSeek seems to have come and gone, but Chinese tech companies are enthusiastically adopting AI discoveries

For a short while in January, Chinese tech startup DeepSeek appeared to have completely changed the rules of the stock market and artificial intelligence (AI) globally.

It is commonly believed that technology is dominated by the United States. Magnificent Seven behemoths like Tesla and Nvidia are often listed among the most popular stocks for individual investors.

On January 27, however, Nvidia's market value dropped by nearly £600 billion, the biggest one-day drop ever, as the global stock market was rocked by the Chinese AI start-up DeepSeek.

According to reports, its flagship chatbot, DeepSeek-R1, could outperform most Western models, such as ChatGPT, even though it only costs £6 million to train (a small portion of the £100 million+ that ChatGPT is said to cost) and doesn't require Nvidia's most advanced chips. It appears that this removed the foundations of Nvidia's whole investment case.

However, Nvidia's stock recovered most of the ground it had lost in just one month. Although its share price dropped in the wake of the Liberation Day tariff announcement in April, it has since risen to new heights and become the first £4 trillion company in history.

Given how swiftly the US stock market has moved on from DeepSeek, you could be forgiven for believing that it was a passing fad.

However, DeepSeek's adoption in China has continued at a rapid pace, and the company may provide new opportunities for the nation's heavily criticized technology stocks.

Does the DeepSeek effect still exist?

The markets appeared to dismiss DeepSeek's initial explosive impact on the AI scene for a variety of reasons.

"The viability and the reliability of the information that we had received over that weekend back in January began to be questioned," says Bola Onifade, portfolio manager at Nutmeg, which is owned by JP Morgan.

It looks like DeepSeek has simplified its model from that of ChatGPT's creator, OpenAI. Although distillation lowers its own costs, it does not lower the overall costs of creating a model from scratch because it effectively duplicates much of the performance of a large AI model in a smaller model. Stated differently, Nvidia continued to receive payment.

There have also been rumors that DeepSeek may not have been entirely truthful about not depending on Nvidia chips. It was officially denied access to the most advanced versions because of US export restrictions on strategically important technology to China. Before the end of January, the US Commerce Department began looking into allegations that DeepSeek had obtained controlled Nvidia chips. In February, Reuters revealed that Singaporean authorities had accused three men of fraud for allegedly obtaining cutting-edge Nvidia chips for DeepSeek.

Even DeepSeek seems to be heavily dependent on Nvidia's technology. According to a report published by the Financial Times on August 14, DeepSeek's attempt to train its latest model, R2, using Huawei's Ascend processorChina's domestic substitute for Nvidia's chipshad delay the model's release.

The Jevons paradox: the reason DeepSeek raised expectations for AI.

The primary reason the market moved past DeepSeek's initial impact was when it realized that, even if true, the company's claims were a sign of optimism rather than a threat for the AI market.

According to Onifade, "there is definitely a positive angle for AI." Businesses further down the AI value chain, like software companies or other industries, can adopt AI more quickly thanks to DeepSeek's promised faster and less expensive AI.

According to Onifade, "That's a good story." After a period of skepticism, there was a brief moment of realization that this could be beneficial for the AI complex as a whole.

Economists refer to this phenomenon as the Jevons paradox, which holds that increased consumption of a resource results from more efficient use (and hence pricing) of that resource. In a direct reference to the paradox, Microsoft CEO Satya Nadella wrote on X (formerly Twitter) that "As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can't get enough of" and included a link to the Wikipedia article about it.

Jevons' paradox is back! As AI becomes more accessible and efficient, its use will increase dramatically, making it a necessary commodity. 26, 2025.

DeepSeeks' influence in China.

Since its use has been restricted due to security concerns, DeepSeek hasn't yet directly fulfilled this promise in the US. However, this does not imply that many Western businesses are not actively researching low-cost AI development.

However, it has been rapidly embraced in China's public and private sectors. In February, Goldman Sachs forecast that the adoption of AI would provide a 2030 basis point increase in GDP by 2030 and begin to increase Chinese productivity the following year.

Onifade states, "DeepSeek has been rolled out and integrated by big tech companies like Alibaba (NYSE:BABA) and Baidu (NASDAQ:BIDU)."

"In some ways farther along the integration journey" is how she describes these businesses.

"If you believe in the productivity gains that AI will bring about, I think you have to believe that companies that are leading the way in adopting the technology will experience those gains, and deliver it in returns to investors," she continues.

As a result of all of this, the nation's technology is advancing quickly.

"China tech is not sitting on a treadmill and is rapidly ramping up its technology," stated Dan Ives, Wedbush Securities' head of global technology research. Tech heavyweights Huawei, Alibaba, Baidu, Tencent (HK:0700), Xiaomi (HK:1810), and others are actively seeking to accelerate their aspirations in the field of artificial intelligence.

Do Chinese tech stocks make sense to invest in?

Buying Chinese tech stocks is similar to stepping into an entirely different ecosystem than what Western investors are used to in many ways.

China is the only country in the world where the top three cloud providers are not Amazon, Microsoft, and Google. The Synergy Research Group data shows that Alibaba, Tencent, and China Telecom (HK:0728) hold those positions in China, with Huawei coming in at number four.

Purchasing tech companies from China has several benefits, one of which is that they are often less expensive than their American counterparts.

The forward P/E ratios of Alibaba and Baidus are currently 14 and 12, respectively, while Magnificent Seven stocks typically trade at multiples of 30 times projected earnings or higher.

But this undervaluation is justified by the fact that buying Chinese stocks is risky.

According to Onidafe, "you're dealing with a very heavyweight government." That has benefits, such as the enormous resources the Chinese government is investing in projects like Eastern Data and Western Computing, which aim to construct a vast network of data centers in the country's west.

For Chinese tech stocks, however, it can and has had a negative impact. One poignant example is the tech crackdown that followed the government's 2020 blocking of Ant Group's initial public offering.

According to Onifade, "investors have sticky memories; they recall these events."

However, the government is currently supporting its tech industry, she adds. Given the adoption of some Chinese tech companies, now is a good time to take another look at China and consider how to allocate your portfolio over the ensuing years.

How Chinese tech stocks can be invested in.

Investing in China's tech ecosystem is more difficult than in the US because China is a little more closed to foreign investors. Though you will need to check exchange rates when evaluating a company's fundamentals, some Chinese tech companies, such as Baidu and Alibaba, have American Depository Shares (ADS) listed on US stock exchanges like the NASDAQ. These ADS can be bought and sold similarly to US tech stocks.

Given the laxer regulations governing company listing, some, like Tencent and Xiaomi, are accessible as Pink OTC stocks, which are frequently perceived as riskier. As an alternative, you might be able to purchase shares of these companies that are listed in Hong Kong if your provider permits it.

Investing in funds that provide exposure could be a simpler way to purchase Chinese tech stocks. The simplest way to do this would be through an index fund such as MSCI China, which as of July 31 had an 8 percent weighting towards the IT sector, excluding firms like Tencent and Alibaba, which together make up 27 percent of the index and are categorized as consumer services and consumer discretionary, respectively.

For investors looking for a more focused strategy, Fidelity International's China Innovation Fund is a good choice. It focuses on Chinese tech companies that provide quality and growth at affordable prices. Tencent, Alibaba, and Xiaomi are among the top ten holdings as of July 31.

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