Hang Seng Tech Index soars to three-year high. What’s next?

Chinese Tech Stocks Surge—What’s Driving the Rally

Since DeepSeek’s announcement in late January, Chinese equities—particularly technology stocks—have staged a strong rally. The Hang Seng Index (HSI) has climbed nearly 16%, while the Hang Seng Tech Index has gained over 20%. The launch of China’s own artificial intelligence (AI) models has challenged the perception that the country is falling behind in the AI race and despite US restrictions on cutting-edge chip exports, China has demonstrated its ability to advance AI technology independently.

DeepSeek’s launch is expected to accelerate AI innovation in China, with major tech firms like Alibaba and Baidu rushing to release their own AI models. Its integration into platforms such as Tencent’s WeChat and Baidu’s search engine could also set a precedent for broader adoption, as more companies explore AI to enhance user engagement and potentially drive higher profitability.

The improved earnings potential has led investors to reassess valuations in Chinese equities. Despite a 16% rally over the past month, the Hang Seng Index remains reasonably priced at a price-to-earnings (P/E) of 11x, in line with its long-term average.

More than just AI

Beyond AI-driven optimism, several tailwinds have also been supportive in improving sentiments around Chinese equities. US tariffs have proven far less disruptive than initially feared, with tariff threats increasingly viewed as a negotiating tactic rather than an imminent policy shift. The current US-China dynamic is also notably warmer than the confrontational tone of the 2018 trade war, with references to a “possible” trade deal and Donald Trump describing President Xi as “a great friend.” While no concrete agreement is on the table just yet, markets are embracing the optimism.

Meanwhile, a rare closed-door symposium between President Xi and prominent entrepreneurs suggests that regulatory pressures may be softening, further reinforcing bullish sentiment. Additionally, after years of underperformance, Chinese equities are rebounding from extreme bearish state, with the rally further amplified as shorts unwind.

Hang Seng Tech Index – Formation of higher highs and higher lows

For the Hang Seng Tech Index, the medium-term trend leans on the upside, characterised by a series of higher highs and higher lows. The recent break above the October 2024 high reinforces the upward momentum. Medium-term price target may highlight the 6,500 level as a key resistance zone, where a bullish pennant breakout projection aligns with an upper channel trendline resistance.

Thus far, the index has surged more than 30% over the past month, pushing near-term technical conditions into overbought territory. While there is no definitive timeframe for how long it can sustain at these levels, a lower-risk approach may favour buying on pullbacks, potentially with the daily relative strength index (RSI) reverting back to more neutral levels closer to the midline.

In terms of support, the 5,460 level—a previous resistance now turned support—will be a key area to watch for potential stabilisation.