DeepSeek implications for China equities
Impact on China's tech giants, semiconductor industry and broader sentiments
Last week was the Chinese New Year in China. But holiday conversations have been dominated by DeepSeek.
In the same week that Nvidia lost ~16%, marking the largest loss of market capitalization in a single day in human history, Chinese stocks have been gaining new ground. Alibaba, for instance, shot up almost 11% last week on the back of news of the introduction of its own Qwen-2.5 model, which it claimed to outpace DeepSeek. Kingsoft Cloud (KC.US, 3896.HK), a more speculative cloud service provider (CSP) play that’s affiliated with Xiaomi, has surged by 40% since the day Nvidia tanked.
Even this week, after Trump announced the new tariffs, the Hang Seng index held its ground quite well on Monday and shot up by 2.8% on Tuesday.
It’s clear that some “vibe shift” is taking place.
In Baiguan’s paying-member exclusive community, one of our members,
(who writes at , “Macro for Civilians“) shared the following chart, showing the relative return difference between MSCI China (FXI) vs S&P 500 (SPY) for the last 12 months……and the downtrend since 2021 seemed to have finally hit bottom and reversed.
So, in fact, a vibe shift has been taking place for quite a while now, and DeepSeek is simply adding new fuel to the fire.
But it’s a very combustible new fuel.
In this article, we will break down the implications of DeepSeek on China’s tech giants and semiconductor sector, as well as broader sentiment about the Chinese market.
#1 Tech giants: Tencent, Alibaba, ByteDance, Huawei, Xiaomi
The first and most obvious impact on China’s tech giants from DeepSeek is that, as Reid Hoffman put it:”China is in the game.”
Until DeepSeek, this was far from consensus. The consensus was that because of US export controls, monopoly of top talents, and AI industry’s reliance on Nvidia’s GPUs, China would be years behind the US.
But DeepSeek has completely turned the table for that narrative. Although DeepSeek itself is a self-funded independent house that doesn’t seem to have a direct commercial interest, its existence proves that the right talents and technology exist in China, while Alibaba’s Qwen-2.5 proves that it’s not just about DeepSeek but may be a general proliferation of technology.
And it’s not just about the Chinese market. For the world outside of China and the US, China’s “Magnificents” will compete with Magnificent 7 on an equal footing now.
An important thing to note here is that DeepSeek’s impact on the tech industry will be different in the US and China due to the special structure of China’s tech giants.
DeepSeek proves one thing: with enough engineering genius, you could make LLMs with substantially lower cost than originally thought possible. With lower costs come higher usage, benefitting end-use cases such as SaaS and consumer applications. The net impact on computing power will also be positive. The only losers will be for-profit LLM companies charging a toll for base models (e.g., OpenAI, Anthropic, etc.) and, to some extent, Nvidia, which now has the burden to prove that their sky-high profit margins still make sense. Models and GPUs will probably be as ubiquitous as water and electricity, but they will only be able to charge like water and electricity.
By that logic, some on Wall Street seem to be reaching a consensus on a new ranking order of the Magnificent 7: Meta > Apple > Amazon > Tesla > Microsoft > Google > Nvidia. The more a company leans toward the application side and less toward base models, the better. The impact on CSPs (Amazon, Microsoft, Google) is more mixed but generally positive, as expectations for higher volume offset lower margins1.
But there are many important differences between US tech giants and China’s.
First of all, unlike more “specialized” peers in the US - China’s tech giants tend to be more integrated players. Take Tencent as an example; it runs WeChat, which is China’s largest social media and IM platform, operates China’s largest payment network, is China’s largest video game company, and also operates Tencent Cloud, one of China’s largest CSPs. Tencent is Meta + Amazon, spanning to-consumer and to-business applications, which means that Tencent is set to profit from all the juicy parts of the value chain of a much less costly AI ecosystem.
So are Alibaba (e-commerce, cloud computing, open-source base models), ByteDance (social media, chatbots, cloud computing), Huawei (smartphones, EVs, cloud computing, chip-design) and Xiaomi (smartphones, EVs, cloud computing).
Another positive catalyst is the role AI will play in China’s cloud computing industry, which is very different from the US.
[The rest of the article is reserved for paying subscribers of Baiguan]