China equity performance has diverged meaningfully year-to-date. Offshore China has lagged, with MSCI China down 8.5%, while onshore China’s CSI 300 is up 5.5% and has held near cycle highs. Hang Seng Tech, the key offshore technology benchmark, is down over 10% and has underperformed MSCI AC World by roughly 20 percentage points. This divergence reflects more than short-term positioning: it highlights differences in index exposure, market drivers, and perceived beneficiaries of China’s artificial intelligence (AI) development.

Onshore indices have benefited from exposure to industrial upgrading, hardware technology, power equipment, and policy-linked manufacturing themes. Offshore China, by contrast, remains more exposed to internet platforms, consumption, financials, property, global liquidity, and geopolitical risk. Global investors have also preferred Korea and Taiwan as cleaner beneficiaries of the AI hardware and supply-chain cycle (Exhibit 1). For offshore equities to catch up, investors likely need clearer evidence of earnings upgrades, improving domestic demand, easing competition, policy follow-through, and a lower geopolitical risk premium. 

Why has Hang Seng Tech lagged?

Hang Seng Tech’s underperformance reflects sector mix, earnings pressure, and a shift in the AI investment narrative. Internet platforms, autos, and consumer-related names represent a substantial share of the index, and each has faced distinct headwinds. Platforms continue to deal with regulatory and competitive pressure; autos face intense domestic price competition; and consumer companies have not yet benefited meaningfully from demand-side stimulus.

The AI trade has also evolved. Investors are no longer rewarding AI ambition alone. The market has shifted from software optionality toward hardware enablers such as chips, servers, power infrastructure, and North Asian supply-chain leaders. This has weighed on large Chinese platforms, which are perceived to be in a “heavy investment, light return” phase: AI capex and R&D are rising, but monetization through advertising, e-commerce, cloud consumption, and AI applications has not yet accelerated enough to support a broad re-rating. For the large platforms, sentiment is capped by three things: unclear AI monetization, mixed earnings delivery (notably e-commerce/ads), and intense competition—especially in fast delivery and adjacent ecosystems. 

That said, the pullback does not necessarily signal fundamental deterioration. Leading platforms remain profitable, but investors have moved from valuation re-rating to earnings proof. A more constructive setup could emerge if earnings delivery improves and AI investment begins to translate into revenue growth, margin support, stronger engagement, or new product adoption. In that scenario, profitability would be better recognized by the market and could help justify renewed re-ratings.

Investors should also watch whether the AI narrative broadens again. Hang Seng Tech has historically shown meaningful correlation with U.S. software (Exhibit 2), and sentiment may improve as markets distinguish between software companies vulnerable to AI disruption and those positioned closer to the center of the AI buildout.

Flows, earnings downgrades, and geopolitics

Flows have added to the pressure. Southbound momentum has slowed, while initial public offerings (IPOs) and secondary offerings have increased equity supply. Earnings revisions have also deteriorated, with the technology complex seeing a roughly 37% downgrade over the past 12 months, largely linked to food-delivery competition and subsidy intensity among leading platforms.

There are early signs this pressure may ease. One leading platform indicated that food-delivery losses narrowed substantially quarter-over-quarter, suggesting competitive intensity may be moderating. Further confirmation in upcoming results would be important, as investors want evidence that losses from new initiatives can decline without damaging core profitability.

Geopolitics remains another major swing factor. H-shares have a higher beta to geopolitical risk, and emerging-market selling after the Iran conflict likely weighed on offshore China equities. U.S. restrictions on high-end AI chips also continue to affect sentiment toward China’s AI buildout. Recent policy/regulatory headlines around cross-border capital rules have also weighed on sentiment. This helps explain why H-shares can look inexpensive but still require earnings upgrades and lower risk premia to sustain a durable uptrend.

Earnings: what needs to turn

On earnings, the question is what has to turn. Competitive intensity easing—especially in discretionary and quick commerce—will likely be the first signal. A clearer property trough will probably help reduce the drag on confidence and credit. And a firmer domestic-demand backdrop will help support more stable volumes and margins for consumer-facing sectors. These are the main checkpoints for the second half.

Macro and policy watchpoints

April macro data and the recent purchasing managers’ index (PMI) prints were weak. Domestic demand cooled, and lukewarm Labor day holiday data offered little relief. April retail sales were nearly flat, and weakness broadened beyond autos into categories linked to trade-in subsidies, including communications appliances and household electronics. Investment moved back into contraction, led by a deeper property drag and softer manufacturing and infrastructure activity. This makes the second-quarter growth path more challenging and helps explain why offshore consumer- and internet-heavy indices have not rallied on AI progress alone.

The picture is not uniformly negative. Services consumption remains resilient, policy-supported new-economy segments continue to hold up, and there are early signs of stabilization—most visible in tier-1 secondary markets—but the recovery still looks partial and uneven, consistent with stabilization rather than a full-cycle rebound. If sustained, this could help stabilize consumer confidence. The April miss may also pull forward more targeted fiscal or administrative support. The key watchpoint is whether activity stabilizes in the coming few months.

Second-half catalysts

For the rest of the year, investors can focus on geopolitical and policy follow-through. 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 support broader risk appetite and help lower the risk premium embedded in offshore China equities.

Sector-level catalysts could also become more supportive. China’s materials and industrials sectors may be relatively better insulated from global energy shocks, given domestic coal availability and expanding renewable capacity. Higher oil prices could also strengthen the relative appeal of electric vehicles (EVs), benefiting domestic EV, battery, and related technology leaders. 

AI infrastructure is another potential bright spot. Leading battery manufacturers are increasingly positioned not only as EV supply-chain beneficiaries, but also as providers of energy storage and integrated power systems for AI data centers. Power equipment companies could benefit from demand for backup power, while natural gas engines may help deliver continuous electricity for off-grid or power-constrained AI sites. The AI buildout is also lifting upstream materials: copper demand for data centers and power systems is rising into tight supply, which supports prices and margins. Aluminum producers can benefit as well—supplying materials for digital infrastructure and grid expansion, while using AI to cut energy use and improve plant stability. These trends broaden China’s AI opportunity beyond internet platforms and software applications into the physical infrastructure required to support AI adoption.

For internet platforms, potential domestic large language model (LLM) launches, accelerating AI cloud adoption, scalable AI-agent deployment, and further evidence of easing food-delivery competition could help 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 and positive earnings revisions. However, offshore China also offers valuation and income support. Offshore Chinese banks continue to provide dividend yields above 5%, while a modest recovery in inflation could support credit demand at the margin. MSCI China trades near its historical average level, leaving room for upside if earnings revisions stabilize.

Against this backdrop, investors may consider a barbell approach that combines thematic growth leaders with high-quality yielders. Given wide dispersion across sectors and the importance of execution, active stock picking and company-level fundamentals should remain critical. Within AI, the focus can shift from capex announcements to monetization evidence. Shareholder returns and Chinese companies going global can remain additional structural themes for the second half of 2026.

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