Chinese Tech Outpaces Asia in 2025: Citi Downplays Overheating Fears After 17% Rally

Chinese tech stocks have witnessed a substantial surge, primarily driven by the momentum of DeepSeek. The tech sector in MSCI China achieved a notable 11.4% gain in the first trading week after the Chinese New Year holiday, elevating its year-to-date increase to 17%. Meanwhile, tech stocks in Asia excluding China showed minimal movement, recording a slight decline of 0.2%, with a year-to-date advance of 3.1%.

The main reasons for the booming market are as follows:

DeepSeek's R1 technology, a domestically developed AI model, has revolutionized the sector by slashing computational costs by 40% through enhanced algorithms. This breakthrough facilitates faster commercialization in critical areas such as medical diagnostics and industrial robotics.

Recent initiatives by the Chinese government, including a new 50 billion yuan AI industry fund and relaxed cross-border data regulations, are set to propel advancements in cloud computing and autonomous driving.

Internationally, significant shifts are occurring in investment strategies. Appaloosa, one of the world's leading hedge funds, has notably decreased its stakes in Meta by 23% and Amazon by 15%, while amplifying its investments in Chinese tech giants Alibaba and Pinduoduo by 18% and 12%, respectively. This indicates a strategic pivot towards Chinese tech assets.

An unexpected cut in the reserve requirement ratio by the People's Bank of China by 0.5 percentage points on February 10 has injected approximately 1.2 trillion yuan into the economy. This liquidity boost has primarily benefited tech growth stocks.

Given these developments, market analysts are debating whether Chinese tech stocks are nearing an "overheated" phase, prompting investors to possibly rethink their strategies.

In a recent report dated February 12th, Citi addressed growing concerns regarding the potential overheating of Chinese tech stocks. Analysts pointed out that the perceived increase in market crowding within the tech sector is largely a reflection of rising stock values, which in turn boosts overall valuations and fosters positive market sentiment.

Significantly, excluding Xiaomi Group—which represents 45% of the MSCI China Information Technology Index and consistently scores between 98-100% in terms of crowding—the Chinese tech sector, while attracting more capital than other sectors, is not considered the most crowded. Thus, it remains at a considerable distance from reaching an overheated state.

According to Citi, the sectors currently experiencing the highest levels of capital crowding are consumer goods, materials, and financials, with crowding scores of 81.2%, 69.1%, and 68.1%, respectively. The congestion level in the tech sector currently stands at 62.1%, and it has experienced a rapid rate of change over the past month.

Citi also highlighted that a high crowding score should not deter investors from engaging with certain stocks. Following market trends can yield substantial returns. Nonetheless, crowding serves as a critical risk indicator. It suggests that certain triggering events could prompt widespread selling, potentially leading to significant market corrections.

The "Mag7" continues to assert their supremacy in the global tech landscape, marked by steady growth and pioneering contributions in AI innovation. Concurrently, the tech ecosystem in China is on the brink of a significant transformation, propelled by DeepSeek's groundbreaking developments in large language models (LLMs). While U.S. firms maintain a lead with foundational AI models, China is strategically channeling its efforts towards industrial applications. These focus on merging AI with intelligent manufacturing and cost optimization, thereby democratizing AI access for small and medium-sized businesses. Additionally, these initiatives are in sync with national directives such as the "Digital China 2035" policy, underscoring a tailored approach to AI integration that aligns with China's long-term technological ambitions.

As of February 2025, leading investment banks including Goldman Sachs, Citigroup, and BlackRock have highlighted several Chinese concept stocks as prime investment targets for foreign institutional investors. These recommendations reflect a strategic focus on the promising sectors and companies within China's market.

Risk Warning: Investors should be cautious of the escalating regulatory frictions between China and the U.S., the compliance risks related to corporate financial audits, and market volatility triggered by sudden changes in industry policies.