China’s Tech Sector: A Turn in the Tide?
By TMC Research Staff | The Milwaukee Company | tmcresearch@themilwaukeecompany.com
For much of the past five years, China’s once-thriving technology sector has been caught in the throes of regulatory crackdowns, U.S.-led export restrictions, and investor skepticism. What was once a landscape defined by rapid expansion and dynamism from firms like Alibaba, Tencent, ByteDance, and Baidu has turned into a cautionary tale of excessive government intervention and geopolitical strife. Yet, a subtle but potentially powerful shift appears to be underway—one that could mark a turning point for Chinese tech stocks.
The catalyst? The emergence of companies like DeepSeek, a Chinese AI startup that appears to have rivaled Western firms in artificial intelligence (AI) innovation despite severe constraints on access to advanced semiconductor chips. If DeepSeek’s achievements are even remotely close to what many commentators claim, then China’s tech sector may be on the verge of demonstrating a resilience that could reshape global perceptions of its future. The lessons learned from its struggle for technological self-sufficiency may, ironically, place Chinese firms on firmer—and perhaps more competitive—footing than their American counterparts.
The DeepSeek Disruption: China’s AI Awakening
DeepSeek’s recent breakthrough—a large language model (LLM) that some consider to be on par with OpenAI’s ChatGPT and Meta’s models, despite being trained on significantly fewer and less advanced chips (a claim that remains contested)—appears to have shaken long-standing assumptions about AI supremacy. U.S. restrictions on semiconductor exports were intended to stifle China’s AI ambitions. Instead, they may have fostered a culture of frugality, optimization, and ingenuity in how Chinese companies develop their technology.
Much like how Soviet engineers managed to keep pace with NASA in the early years of the space race despite having fewer resources, China’s AI sector is making do with what it has. DeepSeek’s claim of using sparse neural network training—an efficiency-focused method that reduces computational load—hints at a broader shift in how Chinese companies are approaching high-stakes technology. This efficiency-first mindset could allow China to sidestep the Western tech sector’s growing reliance on brute-force computational power, which demands expensive and often scarce chips.
Despite this focus on an efficiency-oriented future of generative AI, DeepSeek’s rise comes at a time when US firms like Amazon, Alphabet (Google’s parent company), OpenAI, and Microsoft have committed to spending tens and even hundreds of billions of dollars on expanding computing resources and building massive data centers to support AI development.
More importantly, DeepSeek’s decision to open-source its AI model presents a fundamental challenge to Western tech giants, which have increasingly moved toward proprietary, closed-loop AI systems. The implications are profound: if China’s AI sector continues down the open-source path, it could catalyze broader adoption across industries, making AI development more decentralized and collaborative.
Interestingly, following DeepSeek’s rapid success and its ascent to the top of Apple’s and Google’s app stores, OpenAI recently released a similar model, O3, and committed to more open-source initiatives—moves that appear to be a direct response to DeepSeek’s rise. Meanwhile, Meta Platforms (Facebook’s parent company) has touted its own LLaMA model for its open-source architecture, going so far as to credit itself, at least in part, for the success of DeepSeek’s approach.
Kaizen with Chinese Characteristics
A key reason why DeepSeek’s success is more than an isolated incident is that it taps into a wider trend in China’s industrial strategy. The concept of kaizen, a Japanese term for continuous, incremental improvement, has quietly found a new home in China. Once a defining characteristic of Japan’s post-war manufacturing boom, kaizen (, per reporting from the Financial Times) seems to have now become a force behind China’s progress in AI, electric vehicles, and semiconductors.
Chinese firms have mastered the art of improving on existing technologies through relentless iteration and efficiency-driven engineering. In industries ranging from high-speed rail to robotics, China appears to be leveraging a combination of cost discipline and technological refinement to close the innovation gap. DeepSeek’s success represents a software-driven manifestation of this strategy, where China is compensating for hardware constraints with algorithmic ingenuity.
Moreover, China has been actively recruiting Japanese engineers who are experts in kaizen, bringing in external expertise to refine its approach. This infusion of knowledge, paired with the sheer scale of China’s talent pool, creates a potentially formidable environment for rapid technological evolution.
The Shift in Investor Sentiment
For years, foreign investors have shied away from Chinese tech stocks due to regulatory uncertainty and economic headwinds, which have seemingly worsened since 2019 under the leadership of Xi Jinping. However, developments surrounding DeepSeek suggest that the tech sector is not as beleaguered as previously thought. The Chinese government, having largely completed its regulatory crackdown on internet giants, appears to be pivoting toward a more supportive stance on AI and semiconductors.
Additionally, years of subdued economic growth and a significant bubble collapse in the property sector appear to have prompted Beijing to relax its excessively domineering regulatory stance on local tech giants, allowing them more room to innovate and grow.
There is also the matter of valuation. While U.S. tech stocks, buoyed by the AI boom, have reached sky-high multiples—levels not seen since the dot-com bubble era—their Chinese counterparts remain heavily discounted. If China’s AI sector can demonstrate continued progress despite constraints, investors may begin to re-evaluate their stance on companies like Alibaba, Tencent, and emerging AI firms that stand to benefit from a more permissive policy environment.
Furthermore, Beijing’s renewed confidence in homegrown talent—exemplified by DeepSeek’s domestically trained research team—suggests a long-term commitment to fostering independent innovation. According to the company, its employees were predominantly recruited from local universities, with some having limited work experience. This shift could reinforce government investment in higher education institutions, where Chinese universities have made a rapid ascent over the last decade, significantly increasing their research output—particularly in fields such as AI, neural networks, and computer graphics. Unlike previous state-driven industrial policies, this new wave of innovation appears to be more organic, driven by necessity rather than decree.
Stock Market Reaction : QQQ vs. CQQQ
To illustrate the shifting dynamics in the U.S. and Chinese tech sectors, consider the performance of two prominent exchange-traded funds (ETFs) that serve as barometers for their respective markets: the Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100 Index, and the Invesco China Technology ETF (CQQQ), which focuses on a broad basket of Chinese technology companies.
As of February 10, 2025, QQQ holds a modest year-to-date gain of 3.7%. In contrast, CQQQ ended the day, marking a significantly stronger year-to-date increase of approximately 16.6%—nearly five times that of its American counterpart. This divergence underscores growing investor confidence in Chinese tech firms, possibly fueled by breakthroughs like DeepSeek’s and a more supportive regulatory environment.
The Road Ahead: A New AI Landscape?
DeepSeek’s success may also serve as a reminder that innovation often thrives under constraints. The Western narrative that China’s AI ambitions would crumble without access to Nvidia’s most advanced chips is proving to be, at best, incomplete. Rather than relying solely on brute-force computational power, China’s AI firms are optimizing their way to competitiveness—even as questions persist about whether DeepSeek’s parent company may have understated the computational power required to train its models. This remains a hotly debated topic, with speculation that DeepSeek and other firms are finding loopholes to bypass Nvidia’s export restrictions.
All things considered, it appears that the U.S. approach of outspending rivals with sheer processing power may not be as sustainable as once thought—especially if Chinese firms continue to develop AI models that require fewer resources while leveraging a more open-source approach, in contrast to the proprietary architectures favored by most American tech firms.
If this trend holds, it could signal a broader reassessment of Chinese companies—and, by extension, the place of Chinese tech stocks in the global technology order. Such a shift may have far-reaching implications for China’s capital markets, which have lost much of their luster in recent years due to challenges in the regulatory environment, concerns over domestic growth, and an increasingly fraught relationship between China and the West, particularly the United States.
The DeepSeek moment, while not quite a Sputnik moment—though many, including notable tech evangelist Marc Andreessen, have described it as such—could indicate that China’s AI sector is not merely surviving U.S. export controls but evolving in ways that make it uniquely competitive.
However, numerous obstacles could still derail this nascent renaissance in China’s tech sector, not least of which is the potential for renewed U.S. trade hostilities. President Donald Trump’s administration has been notably combative on trade issues, particularly regarding the trade deficit the U.S. runs with China. The administration has also been highly critical of China’s policies supporting and subsidizing domestic players. His administration has already imposed a 10% tariff on all Chinese goods, with the possibility of further levies on the horizon. The Biden administration had previously introduced stringent export controls and considerable tariffs on Chinese products, and additional tariffs could deal another blow to China’s tech sector. While the sector is less reliant on exports than industries such as manufacturing, it is not entirely insulated from the fallout of escalating trade restrictions. Given these considerable uncertainties, it remains difficult to determine the future trajectory of U.S.-China trade relations and their impact on the Chinese tech industry.
For investors, however, the message does appear to be becoming increasingly clear: China’s tech sector may have faced significant headwinds, but it is far from obsolete. If anything, it is evolving—more agile, resourceful, and potentially more competitive against its Western counterparts than ever before. As the AI arms race intensifies, success may no longer be dictated solely by raw computational power but by the ability to apply AI efficiently in real-world scenarios. In this regard, despite the mounting economic and geopolitical pressures, China’s tech industry may yet defy expectations, adapt to its constraints, and ultimately be in a position to reshape the global competitive landscape.