Hong Kong stocks closed up on Friday. China’s growing clout in the artificial intelligence space has sparked a wave of optimism toward the nation’s tech shares, with a gauge approaching a technical bull market and brokers issuing upbeat calls.

The Hang Seng Index rose 1.2%. The Hang Seng Tech Index climbed 1.8%.

Among the gainers, Horizon Robotics rose 10%; Li Auto rose 8%; Lenovo Group rose 6%; Xiaomi and BYD rose 5%; Meituan rose 3%; Tencent rose 2%; Alibaba rose 1.5%.

Chinese startup DeepSeek’s AI model is being hailed as a game-changer for the tech industry, highlighting the nation’s innovative capabilities. It’s also prompting investors to rethink the investment thesis for China’s beaten-down shares, just as the market was caught in the crosshairs of a tariff war following Donald Trump’s return to the White House.

“This is a sector that has been ignored but like other purely domestic sectors, there are some bright spots,” said Sat Duhra, portfolio manager at Janus Henderson Investors in Singapore. “The recent DeepSeek announcement is a timely reminder that behind the scenes, industrial policy — for example Made in China 2025 — has pushed many sectors toward world-class status.”

Wall Street brokers are upbeat, arguing that the Chinese discount will vanish as gauges top prior highs due to China’s manufacturing strength and tech competence. DeepSeek emerged as an AI threat after it unveiled an app developed at a fraction of the cost that US rivals spent to build their products, even amid curbs on imports of the most cutting-edge chips to China.

“We think 2025 is the year the investing world realizes China is outcompeting the rest of the world,” Deutsche Bank analyst Peter Milliken wrote in a Feb. 5 report entitled “China Eats The World”. The note went viral on the Chinese internet search engine, with the local investment community applauding the upbeat comments.

“Investors we believe will have to pivot sharply to China in the medium term, and will struggle to get access to its stocks without bidding them up,” Milliken wrote.

Deutsche Bank Says Investors Will Flood Into Chinese Stocks Soon

HSBC said the valuation gap between China and emerging markets may narrow, as foreign fund inflows pick up amid a growing awareness of the nation’s technological prowess.

“In addition, A-share tech companies may also benefit from policy support,” Steven Sun, head of research at HSBC Qianhai Securities Ltd., wrote in a Feb. 6 note. “The missing link is that innovation in China has yet to be translated into higher profitability, which can only be solved through demand-side stimulus.”

The positive tone stands in contrast to the bearishness that has weighed on Chinese equities in recent years as investors contend with a property-sector slump and lackluster economic data. Washington’s recent decision to slap a 10% tariff on China’s goods had added to the headwinds.

Southbound flows edged higher in January as onshore investors piled into Hong Kong’s tech shares and the trend may persist due to AI tailwinds, Bloomberg Intelligence strategist Marvin Chen wrote in a note.

Favorable valuations have also helped to reinforce the upbeat sentiment. The HSTECH index is trading at 17 times forward earnings estimates, compared with 27 times for the Nasdaq 100 Index, according to data compiled by Bloomberg.

To be sure, Morgan Stanley strategists reiterated their cautious stance on China’s semiconductors and hardware stocks in a note dated Feb. 1, citing broader tariff and other risks. These include the possibility that the US may expand curbs on advanced chip sales to Beijing.

Despite the latest rally, the HSTECH gauge is still more than 50% below a peak reached in early 2021. In addition, Morgan Stanley said foreign funds probably withdrew $2.4 billion from Chinese stocks in January although the pace of decline was likely slower than the previous month’s.