China is intensifying its efforts to become self-reliant in technology, focusing on AI, semiconductors, aerospace, and clean energy. The country’s fourth plenum has laid out a plan for the next five years to transform the economy into a modern industrial powerhouse. This drive for technological advancements is deemed essential by the National Development and Reform Commission.

Valuation Concerns

Despite the initial boost in tech stock sentiment, valuations are becoming a concern. The Hang Seng Tech Index is up 35% year-to-date, but the rally is driven more by sentiment than earnings. Bloomberg consensus forecasts a 25% EPS decline for the Hang Seng Tech in 2025, followed by a 44% rebound in 2026. The next phase of growth will depend on domestic chipmakers’ ability to turn policy momentum into profits.

China’s tech firms are increasingly aligning strategies with national priorities under the “AI Plus” initiative, which aims to integrate AI across sectors to drive productivity. However, this focus means tech platforms may prioritise nation-building over short-term profitability. Investors should focus on profitable technology leaders with exposure to policy-linked industries, keeping risks like earnings disappointments and geopolitical tensions in mind. The market needs profit delivery rather than further policy promises for continued growth.

We’ve seen a powerful rally in Chinese tech this year, with the Hang Seng Tech Index up 35% based on policy optimism. However, the gains have pushed valuations to stretched levels, especially with a 25% earnings decline expected for 2025. The coming weeks will test whether this optimism was justified or simply a sentiment-driven bubble.

With valuations for key chipmakers like SMIC now trading near 80 times forward earnings, downside protection is critical. We believe buying put options on broad tech ETFs, such as the Hang Seng Tech Index ETF (3067.HK), is a sensible strategy ahead of the Q3 earnings season. This allows traders to hedge long portfolios or speculate on a correction if companies fail to meet lofty expectations.

Economic and Geopolitical Risks

The broader economic environment justifies this caution. China’s recently reported Q3 GDP growth of 4.8% came in just below consensus forecasts, confirming that the domestic recovery remains sluggish. This macro headwind makes it more difficult for growth-sensitive tech companies to deliver the kind of revenue acceleration their stock prices imply.

Uncertainty is brewing, creating an opportunity for volatility traders. Implied volatility on Hang Seng Tech options has ticked up above 40%, reflecting market anxiety over earnings and policy execution. This suggests that strategies like long straddles could be effective, as they profit from a large price move in either direction.

The geopolitical climate adds another layer of risk, with recent discussions in Washington pointing toward potential new curbs on semiconductor equipment exports. We saw how similar policy headlines created sharp drawdowns in the sector back in 2022 and 2023. Holding unhedged long positions through this period of heightened tension appears unnecessarily risky.

While the overall outlook is cautious, there may be selective opportunities in companies with solid balance sheets and confirmed government contracts from the “AI Plus” initiative launched last year. For these specific names, selling out-of-the-money put spreads could be a way to generate income. This approach benefits from high implied volatility while defining risk, but it requires picking the few companies that can turn policy into actual profit.

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