AI Supply Chain Boom Leaves China's Old-Economy Stocks 18% Below Peak

Chinese stocks listed in Hong Kong are tumbling toward a bear market, as a global rush into artificial intelligence chips and infrastructure leaves the lion’s share of the offshore China index far behind. The Hang Seng China Enterprises Index — a benchmark for mainland companies trading in Hong Kong — has slid nearly 8% year-to-date, ranking among the bottom performers out of more than 90 global equity gauges tracked by Bloomberg. The MSCI China Index, meanwhile, sits just above bear-market territory after shedding 18% from its October peak, underscoring a widening divergence between China’s old-economy equity exposure and the AI-fueled rallies in Taiwan and South Korea. The narrative is simple and stark: global investors are pouring capital into semiconductor supply chains, and China’s dominant financial and consumer stocks have almost no role in that story. Financial shares represent over 28% of the HSCEI, and consumer names nearly 23%. In contrast, semiconductor firms account for at least half of index weightings in Taiwan’s Taiex and Korea’s Kospi, giving those markets a direct lift from surging AI demand. The result is a tectonic shift in portfolio allocations that has amplified the pain for Chinese equities. Earnings revisions paint the picture in crisp numbers: analysts have cut forward earnings estimates for HSCEI members by nearly 3% from a year ago, while raising projections for the Kospi by a staggering 246% and for the Taiex by 58%. The Internet sector, once the engine of excitement for offshore China stocks, is losing momentum. Alibaba Group and Tencent both reported March-quarter revenues that fell short of estimates, squeezed by weak consumer demand, fierce domestic competition, and heavy investments in AI that have yet to translate into stock-boosting growth. Hedge fund CIO Hao Hong captured the structural problem succinctly: “The indices are measuring the wrong side of the economy. The constituents are mostly old economy stocks with little AI exposure, so nobody is paying attention to them.” Lingering concerns about higher-for-longer U.S. interest rates further compound pressure on Chinese valuations, as inflation dynamics keep the Federal Reserve cautious. The flight from Chinese offshore equities is not merely a short-term rotation; it reflects a deeper conviction that the AI megatrend will continue to favor hardware enablers over consumer-platform stocks. For Taiwan and South Korea, the AI windfall is accelerating earnings growth and attracting global capital, reinforcing a virtuous cycle. For China, the missing AI beta has turned the HSCEI into a value trap — cheap on traditional metrics, but devoid of the catalysts that drive momentum-driven funds. Among the few bright spots, mainland-listed chipmakers are beginning to participate in the AI supply chain narrative, but they have yet to alter the composition of the major offshore indexes. The current divergence could persist well into 2026, as long as AI capex spending remains robust and Chinese domestic consumption stays sluggish. If Alibaba, Tencent, and peers can eventually convert their AI investments into revenue and margin improvements, a rerating may follow, but today’s index math offers little comfort. Looking ahead, the key variable is whether China’s policymakers can stimulate consumer confidence and whether the country’s tech giants can pivot fast enough to earn a seat at the AI table. Until then, the HSCEI’s underperformance is likely to continue, marking a period where even China’s most prominent companies struggle to capture the imagination of global investors captivated by the AI revolution.