As China’s technology stocks begin to recover from their recent substantial losses, investors and analysts are focused on emerging concerns that could potentially have a more significant impact than the tariffs implemented by Donald Trump.
The Hang Seng Tech Index has experienced a decline exceeding $350 billion in market value since reaching a high in March, but it has rebounded over 10% in the past four sessions. Despite the positive influence of China’s rapid AI development, geopolitical tensions remain a significant concern.
According to Bush Chu, an investment manager at Aberdeen Investments, actions by the United States against China—such as limitations on financial holdings or potential further sanctions—pose a “serious risk.” There are rumors of potential forced delistings of Chinese stocks from U.S. exchanges and worries about increased restrictions on technology access.
Chu mentioned that such measures could lead to a “sharp selloff” of Chinese technology stocks owned primarily by foreign investors. He also emphasized that many factors have not yet been factored into the market, particularly the broader implications for demand if tariffs weaken China’s overall economy.
The Chinese economy might face challenges due to increased tariffs, now up to 145%, and the ongoing decoupling of the two countries. The technology sector’s substantial index weightings and foreign ownership complicate matters for China’s markets.
U.S. tariff hikes on previously duty-exempt small parcels have severely impacted Chinese e-commerce firms. American depositary receipts of Temu owner PDD Holdings Inc. have decreased by 25% since April began, while ADRs of Alibaba Group Holding Ltd., the largest Chinese firm listed in the U.S., have fallen by 21%.
Outside of online shopping, the direct impact of tariffs is considered minimal, as most of China tech’s revenue and profits are generated domestically. However, non-tariff measures may come into play as tensions rise.
In February, the Trump administration issued a policy memo questioning the mechanism for Chinese listings in the U.S., evoking investor memories of potential mass delistings in 2021 and 2022, which affected China’s markets.
Jaret Seiberg, a TD Cowen analyst, stated in a note that given the already high tariffs imposed by Trump against China, delisting is becoming a more likely retaliatory measure. This elevates the risk of action compared to the previous week.
The U.S. Department of Defense has already blacklisted Tencent Holdings Ltd., China’s largest company by market cap, among others. Although the Pentagon’s list lacks specific sanctions, it discourages U.S. companies and agencies from interactions with these Chinese firms.
Investor apprehension is evident in the options market, where the cost of hedging against declines in Chinese tech giants like Tencent and Alibaba remains near multi-year highs, following significant increases among Hang Seng China Enterprises Index companies during the recent downturn.
Earlier this year, China’s tech stocks gained popularity as DeepSeek’s success drew investors to the nation’s AI listings. The escalating trade conflict has redirected focus to U.S. efforts to restrict Chinese access to cutting-edge technology.
Citigroup Inc. analysts, including Alicia Yap, mentioned in a note that while it is uncertain if the U.S. will announce new chip export restrictions, there are concerns that tech companies with cloud services and proprietary AI models might face scrutiny and sanctions, potentially pressuring Tencent, Alibaba, and Baidu Inc.
Nonetheless, the sector remains attractive from a valuation perspective, with the Hang Seng Tech Index trading at 15 times estimated forward earnings, below its three-year average of 19 times and the Nasdaq 100 Index’s current level of 24 times.
The sector’s heavy reliance on domestic demand aligns it to benefit from Beijing’s initiatives to support the economy.
Chu from Aberdeen remarked that Chinese tech leaders remain appealing, but investors might hesitate due to current uncertainties. They may re-enter the market when there is more clarity about tariffs and the global economy.
This report was initially published on Fortune.com.
