The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Robyn Mak

HONG KONG, Feb 18 (Reuters Breakingviews) - Chinese stocks look dangerously alluring. President Xi Jinping's meeting with technology tycoons on Monday capped a rally for some of the country's biggest private-sector firms. His show of support for them builds on some recent wins in their artificial intelligence innovations. But it also precedes big challenges on the horizon.

Since upstart DeepSeek released its groundbreaking low-cost large language training model last month, Hong Kong's Hang Seng technology index .HSTECH, which counts most of China's AI giants as constituents, is up by nearly a fifth. There is rising optimism that the country can catch up with, or overtake, American innovators like OpenAI and Meta META.O. The rare show of support from the Chinese leader for Alibaba 9988.HK founder Jack Ma and bosses from DeepSeek, Huawei, BYD 002594.SZ, 1211.HK and more, further fuels hope that regulatory crackdowns on the sector are over. Since late January, investors have added $210 billion in combined market value to Tencent 0700.HK and Alibaba alone.

True, AI's immense potential is tantalising. Analysts at Goldman Sachs estimate adoption of the technology could lift earnings per share in Chinese stocks by 2.5% annually over the next decade and will underpin a 16% rally in the MSCI China .MICZ000I0NUS over the next twelve months as growth prospects of the world's second-largest economy improve.

Yet Xi's affirmation of the state's unwavering support for private firms echoes his sentiments at a similar confab in 2018, not long before the tech crackdown began. Chinese officials are currently setting up a committee to develop AI industry standards and risk assessments. That suggests a bigger role ahead for the government and sharply contrasts with the approach in the United States, where President Donald Trump is dismantling his predecessor's efforts to curb AI risks.

The immediate threat to China's tech giants, though, may be an intensifying price war. AI offerings from upstarts DeepSeek, Zhipu and more have proliferated alongside deep-pocketed incumbents like Alibaba and Baidu 9888.HK in what one Tencent executive dubbed "a war of hundred models". Last year, Alibaba, for example, announced price cuts of up to 97% on a range of its Tongyi Qwen large language models. The $300 billion e-commerce group, which is due to report quarterly earnings this week, is forecast to generate just $386 million in earnings before interest, taxes and amortisation in the three months to December for its cloud computing unit, per Visible Alpha. And even after the latest rally, the stock is trading at less than half its peak in 2020. China bulls should proceed with caution.

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CONTEXT NEWS

Chinese President Xi Jinping held a rare meeting on February 17 with technology tycoons including Alibaba founder Jack Ma and Huawei's Ren Zhengfei.

Xi's remarks, summarised hours later by state media, stressed continuity in China's economic development strategy. But he also said its private business had "broad prospects and great promise" to create wealth and opportunity. "It is the right time for the majority of private business and entrepreneurs to show their talent," he was quoted as saying in remarks state media called an "important speech".

(Editing by Una Galani and Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))