Where is the extreme trend of Chinese equity assets heading?
Huang Fan, FTChinese.com contributor
Updated at 11:17 on June 4, 2026, by FTChinese.com contributor Huang Fan
Since the beginning of this year, the performance divergence of Chinese equity assets listed in A-shares and A-share-ized Hong Kong stocks has reached an extreme stage. On one hand, "new quality productive forces" assets represented by the STAR Market have rapidly risen driven by narratives such as AI, semiconductors, and high-end manufacturing, with valuation centers continuously and significantly shifting upward, exhibiting a typical characteristic of "prosperity expectation pricing dominance." On the other hand, "old economy" sectors represented by traditional cycles, finance, consumption, pharmaceuticals, and even technology applications continue to face pressure. Under the combined impact of downward profit cycles, shrinking valuation centers, and capital allocation preferences, their performance lags significantly, and they are even being priced with expectations of a long-term economic recession and corporate liquidation.
Thus, the capital market has formed an extremely polarized pattern: "Sci-tech assets soar in the sky, while traditional assets crawl on the ground."
In fact, the coexistence of such "two valuation systems" is certainly illogical. If we believe that we can achieve technological leadership globally, there is no reason for the economy to suffer a long-term recession. Nor should the leading enterprises in traditional industries, which are still earning substantial profits every year, be sold off at bankruptcy liquidation prices. Conversely, the same applies.
I. Are the grand narratives of sci-tech truly translating into substantial returns for investors?
Over the past decade or more, what has been most infectious and easiest to inspire consensus in China's capital market has never been real estate, finance, or cyclical manufacturing, but rather the story of a technology-driven nation. Almost every rally has been accompanied by grand narratives: domestic substitution, overtaking on curves, new quality productive forces, and technological power. The Internet Plus in 2015, new energy in 2022, chips in 2025, and currently AI-related concepts like optical modules...
The launches of the ChiNext and STAR Market essentially serve the same goal: transforming the "national story" of technological progress into investment targets in the capital market.
The breakthroughs achieved by our country in the above fields over the past decade or more are unquestionable, and the enhancement of technological strength is evident to all. But have these breakthroughs truly translated into substantial returns for A-share investors?
A typical characteristic of hard technology is high investment, uncertain output, long commercialization cycles, and the possibility of technological route substitution. Therefore, while hard technology innovation greatly improves social efficiency, shareholders bear all the costs of trial and error.
Companies that sustain profit growth need network effects, data lock-in, and scale and path dependence. These are not technology itself, but structural advantages gradually formed by enterprises in market competition after technology "stabilizes."
In fact, many technology companies invest heavily in R&D, but the return on capital investment is not high. Instead, companies that cannot tell compelling stories build moats through operations and stable cash flow, allowing investors to outperform various technology waves in the capital market over the long term.
The STAR Market has the highest "technology content" in macro narratives, but at the micro level, its profitability and cash flow stability have long been unremarkable.
According to Wind data, the total net profit of 597 companies on the STAR Market in the first quarter of 2026 was approximately RMB 21.64 billion, while Tencent Holdings, which focuses on technology applications, recorded a net profit of RMB 58.093 billion in the same period. Tencent Holdings alone is 2.7 times the total net profit of all STAR Market companies combined.
However, as of May 18, the market value of the STAR Market is about RMB 15 trillion, while Tencent Holdings is only around RMB 3.5 trillion, less than one-quarter of the STAR Market. Since the beginning of this year, Tencent's stock price, which is very cheap in valuation, has fallen by 24%, while the STAR Composite Index has risen by 27%.
The extreme trends shown by the market are very frustrating for rational investors. I have long taught the course "Asset Allocation and Investment Management" for finance master's programs at well-known domestic universities of finance and economics, and it seems that the theories of "investing" have completely failed in China's equity market. I really want to burn the classic investment textbooks to avoid misleading students.
Calming down, the current different pricing logic of Chinese investors for "mature platform cash flow" and "hard technology growth assets" has led to a divergence between profits and market capitalization. This divergence and distortion cannot persist in the long term.
II. Why doesn't the good story of "revitalizing the country through technology" equate to good returns for investors?
Admittedly, the current allocation of national resources is biased towards hard technology, and the STAR Market, which carries semiconductors, AI, high-end manufacturing, and domestic substitution, benefits from long-term policy orientation.
Technological progress creates social value but does not necessarily create shareholder value. Maximizing social value allows for long-term subsidies, trial and error, competition, and redundant investment; the goal is capability diffusion, not profit concentration. Maximizing shareholder value, on the other hand, requires product scarcity, experience moats, and capital investment discipline; and corporate profits must be able to precipitate over the long term, rather than being quickly diluted by competition.
Moreover, truly "good technology" is often prematurely overdrawn by "good stories." Financial markets do not reward "better future" but rather "better than expected." Hard technology indices (such as early-stage semiconductors), due to active pursuit by story-loving investor groups, have already become extremely expensive before the companies even make money (for example, a large number of chip and semiconductor-related companies on the STAR Market). Even if the technology is later proven to be outstanding, the stock price may remain flat or even decline for a long time.
Many companies on the STAR Market are still in the investment stage, with low return on invested capital (ROIC) and unstable profits. The current price surge is more driven by valuation expansion alone. In fact, the current STAR Market in China is more like the early stage of the Nasdaq (1995–2000), when the overall profitability of listed companies on the Nasdaq was also relatively weak, but valuations expanded rapidly under grand narratives. As the market continued to rise, funds poured in, investor risk appetite was extremely high, and they firmly believed "this time is different!"
What was the result? The Nasdaq bubble burst in 2001, and the entire market became like a world that suddenly lost its faith. The internet companies that had been celebrating just the previous year saw their stock prices gradually go to zero. Those "future giants" that had doubled on their IPO day and were touted by the media turned into bankruptcy lists overnight, with hundreds of internet companies liquidated or acquired at low prices. The entire Nasdaq index continued to fall from its peak, eventually dropping about 78% from its high, with trillions of dollars in market wealth evaporating. Investors finally realized again: "Growth stories" cannot replace profitability, and valuations must eventually return to cash flow.
Technology determines how far a country can go, but a company's competitive moat and capital allocation determine whether it can be profitable over the long term. From an investor's perspective, investing in good stories satisfies emotions; investing in good returns tests patience, pricing, and structural understanding. Between the two lies not optimism versus pessimism, but a whole logical chain repeatedly validated by the capital market. If investors today buy the good story of "revitalizing the country through technology," most will face a difficult "road to recovery" rather than compounding returns.
III. Under extreme trends, how should investors respond?
I still firmly believe that although domestic investors are chasing "companies that may change the world in the future," even if truly world-changing companies emerge, only a very few will be among the current STAR Market listed companies. Just as most of the "extremely bullish" companies on the Nasdaq at its peak in 2000 have since vanished, only a few, like Microsoft, have survived to this day and participated in leading the AI wave (and even then, it experienced 15 years of no stock price growth).
Any valuation in the market will eventually return to cash flow realization capability. When the story changes and the liquidity tide recedes, the companies that survive will be those that "truly make money."
The current pricing of China's equity market is no longer based on models but on narratives. Investors believe that "policy support" automatically equals a rise, and "national strategy" automatically justifies high valuations. I think this is a dangerous signal. The lessons of the 2001 Nasdaq crash are still vivid, and many investors have already turned over. There's no need for us to repeat that mistake!
Currently, the dynamic P/E ratio of the STAR Market is above 80 times (Wind data), making it one of the highest in the world. If overall profit growth falls short of expectations, it would be perfectly normal for the average stock price to halve, bringing the P/E ratio back to 40 times.
Therefore, I believe that in this extremely polarized equity market, investors should refuse to "replace pricing with emotions." Instead, focus on companies that can truly generate cash flow.
Looking at the U.S. stock market, the technology companies that have survived long-term and delivered substantial returns for investors are all application-oriented companies that have successfully run "technology scenarios plus commercialization." For example, Apple, Microsoft, Amazon, Meta, Google, Tesla, and Nvidia.
The essence of U.S. "tech giants" is platform-based enterprises. Their commonality is not "high technology content" but rather an ecosystem that integrates developers, users, and enterprise clients. They can transform technology into products, then into user subscriptions and usage fees, ultimately becoming solid long-term cash flows for the company. This is completely different from what many imagine as "tech stocks equal high R&D, high risk."
For example, Apple's core is not "chips" but consumer electronics plus an ecosystem, plus service monetization. Technology is deeply internalized into the user experience, cash flow is extremely strong, applied to the C-end, and the commercial path is clearest.
Another example is Microsoft: technically, it combines cloud, AI, and operating systems. Its investment value lies in enterprise-level subscriptions and deep lock-in of core revenue products like Azure, Office, and Copilot. It is the most typical "investable AI platform."
Amazon: AWS is the "revenue engine" of cloud computing, e-commerce is the entry point for data and traffic, and AI is an amplifier for delivery, recommendations, and computing pricing. In profit conversion, AI is a profit amplifier, not a story.
The other giants mentioned are all technologies that have been voted for by the entire society and industry with money.
In fact, many Chinese companies are operationally more similar to U.S. tech giants. For example, Tencent, Alibaba, Meituan, JD.com, Xiaomi, SMIC, and BYD. Their R&D intensity is not extreme, but their commonality is a highly mature business model; network effects and user stickiness form moats.
The core competitiveness of these companies is not relying on the most cutting-edge underlying technology, but platform-based internet plus digital services; data, network effects, and ecosystem form operational moats. Therefore, their free cash flow generation and capital allocation capabilities are significantly better than most hard technology companies. Among Chinese technology companies, they are currently the most profitable group.
These companies that can consistently earn substantial cash are mostly in the Hang Seng Tech Index. Therefore, although from a "technological breakthrough" perspective, the Hang Seng Tech may not be the most dazzling, from a value creation perspective, it can bring substantial long-term returns to shareholders.
Investors might say: the STAR Market is surging while the Hang Seng Tech is falling. Should we really buy the sector that keeps falling?
I believe that precisely because it has been sold off by domestic investors recently, the current valuation of the Hang Seng Tech sector is relatively low, with an average P/E ratio below 20 times, below the 20th percentile in history, far below the STAR Market's 80 times. Coupled with the deep operational moats and stable cash flow of its major constituent companies, it indeed offers high value for investment.
In an extremely emotional market, I am determined to block out various noises, stick to common sense, and persist in selecting investment targets based on operational moats, free cash flow, and other sustainable profit-generating capabilities. I firmly believe that this will allow me to navigate cycles and remain invincible in the long term. Investment is, after all, about "buy low, sell high," isn't it? You are welcome to do as you please.
Note: This article represents the author's personal views only.
Editor: Xu Jin, Jin.Xu@FTChinese.com
