A stark divergence is splitting China’s technology sector, as mainland hardware makers rally on AI demand while Hong Kong’s internet giants wait for profits to catch up.
China’s A-share market is seeing a tech boom while Hong Kong’s slumps, with the ChiNext Index up 26 percent year-to-date to a record high as of May 20. In sharp contrast, the Hang Seng Tech Index has fallen 7.6 percent over the same period.
"The two markets are not simple mirrors of each other, with A-shares focused on ‘hard’ tech manufacturing and Hong Kong on ‘soft’ application ecosystems," analysts at Guosen Securities wrote in a May 23 report. This structural difference in valuation, profit drivers, and market makeup is dictating their separate paths in the current AI cycle.
The divergence is a direct result of the AI boom rewarding hardware makers’ bottom lines, while application-focused firms in Hong Kong face rising upstream costs and unclear monetization timelines. This has created a crucial decision point for investors navigating China's vast technology landscape.
Hardware Boom Fuels A-Share Rally
The A-share market's strength comes from its concentration of companies that build the physical infrastructure for artificial intelligence. Technology manufacturing firms account for 82 percent of the market capitalization and over 70 percent of profits in the A-share tech space, with electronic and advanced manufacturing leaders like Industrial Fulian and InnoLight directly benefiting from surging demand for AI computing power.
This demand is concrete. Capital spending from North America’s four largest cloud providers is expected to approach $100 billion in 2025, a 74 percent increase from 2024. The price of essential components like DDR5 memory has climbed from roughly $5 to nearly $40 since the beginning of 2025. This hardware-first phase of the AI buildout provides a clear and verifiable revenue stream for mainland companies.
According to the Guosen report, this has allowed China's domestic computing industry to shift from a narrative driven by government policy to one proven by industrial demand, as domestic AI models are now being developed in tandem with homegrown hardware.
Applications Face Headwinds in Hong Kong
In contrast, Hong Kong’s market is dominated by application-focused internet giants like Tencent Holdings (0700.HK) and Alibaba Group Holding (9988.HK). These companies make up over half the market cap and nearly 70 percent of the profits in the Hang Seng Tech Index. While they are actively developing their own large language models, they are currently positioned further down the AI value chain.
This leaves them exposed to rising costs for the very hardware that is enriching their A-share counterparts. Compounded by intense competition and a lack of clear commercial breakthroughs for AI applications, their path to profitability is less certain. As a result, the net profit growth for Hong Kong-listed tech firms is projected to fall from 30.6 percent in 2024 to just 7 percent in 2025.
This uncertainty, combined with a higher proportion of foreign investors sensitive to US dollar liquidity and geopolitical risk, has pushed valuations to historic lows. The Hang Seng Tech Index currently trades at a price-to-earnings ratio of 21 times, in the bottom 17th percentile of its historical range. Analysts suggest that should AI applications achieve commercial scale, these internet leaders possess the technical foundation for a significant rebound, offering potential medium-term elasticity for patient investors.
This article is for informational purposes only and does not constitute investment advice.
