Driven by artificial intelligence narratives, Chinese technology stocks have left their American counterparts far behind in performance this year.

Since the beginning of the year, the Hang Seng Tech Index has soared 41%, significantly outpacing the Nasdaq's 17% gain over the same period.

This rally, which began with DeepSeek's AI breakthrough early in the year, gained further momentum in September.

"The entire narrative around Chinese AI has completely changed," said Winnie Wu, Chief China Equity Strategist at BofA Global Research.

"It feels like China is making breakthroughs in AI computing power, which is a very important bottleneck."

AI Large Model Breakthroughs Become Key Turning Point

"Animal spirits are back," said Albert Kwok, Emerging Markets Equity Portfolio Manager at PGIM Jennison Associates. He noted that DeepSeek's emergence in February became a "pivotal moment" that changed everything.

Additionally, AI large models such as Alibaba's "Qwen," Tencent's "Yuanbao," and Baidu's "Ernie X1.1" have received positive reviews from analysts and ranked highly in industry benchmarks.

These developments have ignited market hopes for widespread commercialization of AI technology in China and productivity improvements. Furthermore, progress made by companies like Baidu in developing proprietary high-end chips, along with increased AI infrastructure spending, has supported this rally.

Since the beginning of the year, Alibaba, Tencent, and Baidu's stock prices have risen 96%, 55%, and 59% respectively. In just the past month alone, Alibaba and Baidu have gained 31% and 48% respectively.

"This is the fourth industrial revolution," said Bush Chu, China Equity Portfolio Manager at abrdn.

"We are witnessing AI fundamentally transform how people work and interact with machines and even society."

Overseas Capital is Flowing In

This optimism extends beyond large tech companies to chip manufacturers like Cambricon and biotechnology companies. Since the beginning of the year, the CSI Artificial Intelligence Index has returned over 61%, while the Hang Seng Biotech Index has surged 98%.

Initially, the main buyers in this AI rally were mainland Chinese investors. However, as technological advances become increasingly clear and valuations remain relatively attractive, global investors are also beginning to refocus their attention.

"Foreign investors are coming back, rebuilding their exposure to China," said Jack Siu, Head of Asia Discretionary Portfolio Management at Lombard Odier.

Albert Saporta, CEO of GAM Holding, also noted: "Chasing momentum is a global disease. Being underweight Chinese tech stocks would be painful."