Wall Street has a new favorite trade, and it involves picking sides in China’s AI wars.
Global investors are increasingly splitting Chinese tech stocks into two buckets: companies positioned to ride the AI wave, and those likely to get swamped by it. The result is an emerging pair trade strategy that has reportedly returned around 130% year-to-date, largely by going long on AI outperformers like Alibaba while shorting laggards like Meituan.
The valuation gap driving the trade
The Hang Seng Tech index currently trades at roughly 24 times earnings. The Nasdaq, by comparison, sits at approximately 31 times. That’s a nearly 23% valuation discount for a sector that, by most accounts, is producing increasingly competitive technology.
Alibaba has emerged as the primary beneficiary. The company’s AI chip unit and cloud infrastructure business have made it a magnet for global fund managers who want exposure to Chinese AI without betting on the entire ecosystem. Investors are simultaneously increasing their Alibaba positions while trimming exposure to the Magnificent Seven, a strategic hedge that lets them stay in AI while diversifying away from US concentration risk.
