China equity performance has diverged meaningfully year-to-date. Offshore China has lagged, with MSCI China down 10.8%, while the CSI 300 is up 2.0% and continues to make new highs. Hang Seng Tech is down by around 5%, underperforming MSCI AC World by roughly 14 percentage points.

This divergence reflects structural differences, not just positioning. Onshore indices benefit from industrial upgrading, hardware technology, power equipment, and policy-linked manufacturing. Offshore China remains exposed to internet platforms, consumption, financials, property, global liquidity, and geopolitical risk. Global investors have also favored Korea and Taiwan as more direct artificial intelligence (AI) hardware beneficiaries.

Why has Hang Seng Tech lagged?

Hang Seng Tech's underperformance reflects sector mix, earnings pressure, and a shift in the AI narrative. Internet platforms, autos, and consumer names each face distinct headwinds: regulatory and competitive pressure, price wars, and weak demand.

The AI trade has also evolved. Markets have rotated from software optionality toward hardware enablers—chips, servers, power infrastructure, and North Asian supply-chain leaders. Large Chinese platforms are seen as being in a "heavy investment, light return" phase: AI capex and R&D are rising, but monetization through advertising, cloud, and AI applications has not yet accelerated enough to support a re-rating.

That said, the pullback does not signal fundamental deterioration. Leading platforms remain profitable, but investors have shifted from valuation re-rating to demanding earnings proof. A more constructive setup could emerge if AI investment begins translating into revenue growth, profit margin support, or new product adoption.

Investors should also watch whether the AI narrative broadens again. Hang Seng Tech has historically correlated with U.S. software (Exhibit 1), and sentiment may improve as markets distinguish between companies vulnerable to AI disruption and those positioned at the center of the buildout.

Flows, earnings, and geopolitics

Flows have added pressure. Southbound momentum has slowed while initial public offerings and secondary offerings have increased supply. Earnings revisions have deteriorated, with the technology complex seeing roughly 37% downgrades over the past 12 months, largely linked to food-delivery competition and subsidy intensity.

Early signs of easing exist. One leading platform indicated that food-delivery losses narrowed substantially quarter-over-quarter, suggesting competitive intensity may be moderating. Further confirmation in upcoming results will be important.

Geopolitics remains a major swing factor. H-shares carry higher beta to geopolitical risk, and emerging market (EM) selling following the Iran conflict likely weighed on offshore equities. U.S. restrictions on high-end AI chips continue to affect sentiment. This explains why H-shares can appear inexpensive yet still require earnings upgrades and lower risk premia to sustain a durable uptrend.

Macro and policy watchpoints

April macro data was weak. Domestic demand cooled, retail sales were nearly flat, and weakness broadened beyond autos into trade-in-subsidy-linked categories. Investment moved back into contraction, led by property drag and softer manufacturing activity—making the second-quarter growth path more challenging.

The picture is not uniformly negative. Services consumption remains resilient, policy-supported new-economy segments are holding up, and property transactions show improvement in some regions. The April miss may also pull forward targeted fiscal or administrative support. The key watchpoint is whether activity stabilizes in May and June.

Second-half catalysts

Geopolitics and policy will be central. Working-level U.S.–China discussions, trade and investment commitments, and potential AI-safety dialogue going forward are key. Any reduction in geopolitical uncertainty could lower the risk premium embedded in offshore equities.

Sector-level catalysts are also emerging. China's materials and industrials may be relatively insulated from global energy shocks given domestic coal availability and expanding renewables. Higher oil prices could strengthen the relative appeal of electric vehicles (EVs), benefiting domestic EV, battery, and related technology leaders.

AI infrastructure is a potential bright spot. Battery manufacturers are increasingly positioned not only as EV beneficiaries but also as providers of energy storage and integrated power systems for AI data centers. Power equipment companies could benefit from backup-power demand, while natural gas engines may serve off-grid or power-constrained AI sites—broadening China's AI opportunity beyond internet platforms into physical infrastructure.

For internet platforms, potential domestic large language model (LLM) launches, accelerating AI cloud adoption, scalable AI-agent deployment, and easing food-delivery competition could revive investor confidence.

Investment implications

H-shares remain more sensitive to geopolitics and global liquidity than A-shares, and sustained upside likely requires profit growth as well as positive earnings revisions. However, offshore China offers valuation and income support. Offshore Chinese banks yield above 5%, and MSCI China trades around 0.5 standard deviations below its historical relative average versus MSCI World.

A barbell approach—combining thematic growth leaders with high-quality yielders—is worth considering. Given wide sector dispersion, active portfolio construction remains critical. Within AI, focus can shift from capex announcements to monetization evidence. Shareholder returns and Chinese companies going global remain additional structural themes for the second half of 2026.

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