DeepSeek Fuels $1.3 Trillion Surge in China’s Stock Market as Funds Shift

AI Breakthrough Sparks Renewed Interest in Chinese Equities

DeepSeek’s groundbreaking advancements in artificial intelligence are driving a significant shift in global stock market allocations, with institutional investors increasingly redirecting capital from Indian equities back into China. Hedge funds have been accelerating their investments in Chinese stocks at the fastest rate in months, spurred by optimism surrounding DeepSeek’s AI-driven technology surge and potential government economic stimulus. In stark contrast, India is experiencing an unprecedented capital outflow due to concerns over slowing macroeconomic growth, weakening corporate earnings, and inflated stock valuations.

Over the past month, China’s onshore and offshore equity markets have gained over $1.3 trillion in total value, reflecting a strong reallocation of global investment funds. Meanwhile, India’s stock market has seen a decline exceeding $720 billion. The MSCI China Index is on track to outperform the MSCI India Index for the third consecutive month, marking the longest streak of Chinese stock outperformance in two years.

Ken Wong, an Asian equity portfolio specialist at Eastspring Investments, emphasized DeepSeek’s role in revitalizing confidence in China’s tech sector. "DeepSeek has demonstrated that China possesses companies integral to the global AI ecosystem," he stated. Wong’s firm has been actively increasing its holdings in major Chinese internet firms while scaling back on smaller Indian stocks, which have seen excessive price run-ups beyond their valuation multiples.

Reversal of Investment Trends as China Regains Favor

For years, investors have pivoted towards India, lured by its extensive infrastructure spending and its emerging role as a manufacturing alternative to China. India’s domestically driven economy also positioned it as a relative safe haven amid concerns over potential U.S. tariffs under Donald Trump’s trade policies. However, the latest market developments suggest a reassessment of China’s investment landscape, particularly in the technology sector.

China is regaining appeal among global investors due to a fundamental reevaluation of its market potential. The Chinese government, which previously spooked investors with stringent corporate regulations, now appears to be fostering a pro-business environment. A recent signal of this shift is the invitation extended to leading entrepreneurs, including Alibaba co-founder Jack Ma, for discussions with top policymakers—an indication that Beijing is willing to support its tech industry.

DeepSeek’s success is expected to bolster both China’s economy and stock market performance, fueling long-term growth. Vivek Dhawan, a fund manager at Candriam, noted, "When you consider all the factors at play, China presents a more attractive risk-reward proposition than India in the current market cycle."

China’s Valuation Advantage Over India

China’s stock market also holds a significant valuation advantage compared to India’s. The MSCI China Index is currently trading at 11 times forward earnings estimates, making it considerably cheaper than the MSCI India Index, which trades at approximately 21 times forward earnings. This stark valuation gap adds to China’s growing attractiveness for global fund managers.

An in-depth analysis of Bloomberg data on regional stock allocations reveals that some of the largest active Asian equity funds have been steadily reducing their exposure to Indian stocks while increasing their positions in Chinese equities. This realignment suggests a broader institutional shift favoring China’s long-term growth potential.

AI Boom and Policy Support Drive Market Optimism

While DeepSeek’s AI-driven rally has accelerated capital inflows into China, expectations of additional economic stimulus remain a crucial factor in sustaining investor enthusiasm. Andrew Swan, head of Asia ex-Japan equities at Man Group, believes that Chinese policymakers will focus on boosting domestic consumption and channeling the nation’s high savings rate into productive investments. His firm’s Man Asia Ex-Japan Equity Fund increased its China exposure from 30% to 40% over the past year while reducing its India allocation from 21% to 18%.

Despite this shifting trend, a complete reversal in global fund flows remains uncertain. Investment giants like Morgan Stanley maintain a bullish stance on India, arguing that the recent market correction may be exaggerated and that India’s long-term economic growth story remains intact.

External Risks and Market Caution Persist

Not all market participants are fully convinced of China’s resurgence. The additional 10% tariffs imposed on China by the U.S. under Trump’s trade policies have led Amundi SA to adopt a neutral stance on Chinese equities. Aidan Yao, Asia senior investment strategist at Amundi, cautioned that although a trade truce is possible, geopolitical uncertainties will continue to create challenges for China’s market outlook.

Investor skepticism is further fueled by previous failed rallies in China’s stock market. Some traders highlight concerns over crowded trades and rising valuations, warning that overenthusiasm could lead to market corrections. Helen Zhu, chief investment officer at Nan Fung Trinity HK Ltd., remains cautious about DeepSeek’s long-term impact, stating, "Ultimately, we don’t yet know the full extent of potential monetization opportunities in China’s AI sector."

Nonetheless, momentum in Chinese markets continues to build, reinforcing the perception that "China is back." Alibaba alone has gained $100 billion in market capitalization over the past five weeks, while the Hang Seng Tech Index has officially entered bull market territory.

Nicole Wong, a portfolio manager at Manulife Investment Management, sees DeepSeek’s emergence as a critical turning point. "The DeepSeek breakthrough was a well-timed and impactful catalyst that helped investors justify a strategic reentry into Chinese equities," she explained. "From a tactical investment perspective, capitalizing on this momentum makes strong financial sense."

With China’s AI industry gaining recognition and policymakers signaling a more supportive stance, global investors are increasingly reevaluating their exposure to the world’s second-largest economy. While risks remain, the sheer scale of China’s recent stock market surge suggests that the tides may be turning in its favor.