DeepSeek or DeepFake? China AI Stocks Are Mooning – For How Long?
Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.
After initially stumbling into 2025, Chinese Internet stocks have staged a sharp comeback in recent weeks. Chinese AI company DeepSeek reported AI breakthroughs have reshaped sentiment around China’s technology sector, but it remains to be seen if this is just another head fake or the start of a sustained uptrend.
Chinese stocks, particularly those in the Internet sector, have enjoyed renewed interest due to the fact that DeepSeek released an artificial intelligence (AI) model that rivals those of OpenAI while being trained on cheaper hardware, according to AP News.
China’s Tech Titans Are Waking Up—Will They Keep Roaring?
Several of China’s largest Internet companies have announced interesting developments in recent weeks:
- Baidu (Ticker: BIDU) has announced that its AI chatbot, Ernie Bot, will be available for free starting April 1. This move is part of Baidu’s strategy to expand its AI ecosystem and regain prominence in the competitive AI landscape, according to Investor’s Business Daily.
- Alibaba (Ticker: BABA) shares have also been rallying, helped by the company’s recent confirmation of a collaboration with Apple (Ticker: AAPL) to integrate AI features into iPhones sold in China. This partnership aims to boost iPhone sales in the region by leveraging advanced AI capabilities, according to Reuters.
- JD.com (Ticker: JD) and PDD Holdings (Ticker: PDD) have also benefited from the AI-driven rally, with both stocks surging as traders bet on a rebound in China’s e-commerce sector.
For traders wishing to express an optimistic view on this sector, Direxion Daily CSI China Internet Index Bull 2X Shares (Ticker: CWEB), seeks daily investment results, before fees and expenses, of 200% of the performance of the CSI Overseas China Internet Index.*
Below is a daily chart of CWEB, as of February 14, 2025.
Source: StockCharts.com, February 14, 2025.
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.
AI-Pocalypse Now? China’s Internet Rally Shocks the Bears
A key tailwind for Chinese Internet stocks is China’s push toward open-source AI development, aligning with its broader strategy to close the AI gap with the U.S. The rally, which has occurred despite persistent concerns over trade restrictions and tariffs, is notable given the widespread bearish sentiment on Chinese stocks entering 2025.
“Global investors are starting to reassess China’s investability within the tech and AI space, after an extended period of limited attention,” Morgan Stanley strategists wrote in a research note, as reported by South China Morning Post. “We expect the momentum to sustain in the near term given global investors’ light positioning.”
Some prominent investors, including closely watched hedge fund manager David Tepper of Appaloosa, have increased their stakes in Chinese tech companies.
Regulatory filings revealed Tepper increased his exposure to China-related stocks and ETFs in the fourth quarter of 2024, Benzinga reports. Tepper, who in September said he would buy “everything” related to China, increased his firm’s holdings in Chinese Internet stocks JD.com, Alibaba, and PDD Holdings, according to South China Morning Post.
Considerations for Traders
While the recent rally in Chinese tech stocks has caught the eye of many traders, they should remain mindful of potential risks:
- Regulatory Environment: Despite recent easing, China’s tech sector remains subject to regulatory scrutiny, which can impact company operations and valuations.
- Global Economic Factors: Macroeconomic conditions, including trade relations and currency fluctuations, can influence the performance of Chinese tech and Internet stocks.
- Market Volatility: Leveraged ETFs like CWEB are designed for short-term trading and can experience significant volatility*. It’s important to monitor positions actively and employ risk management strategies.
The resurgence of China’s Internet sector, driven by innovation, investor confidence, and policy support, provides a potential opportunity for investors who want to express a bullish view with CWEB. However, it’s essential to approach these opportunities with a balanced perspective, considering both the potential rewards and inherent risks.
*Definitions and Index Descriptions
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
The CSI Overseas China Internet Index (“Index”) is calculated by China Securities Index Company (“CSI”). CSI does not make any warranties, express or implied, to any of their customers or anyone else regarding the accuracy or completeness of any data related to the Index. All information is provided for information purposes only. CSI accepts no liability for any errors or any loss arising from the use of information.
The CSI Overseas China Internet Index (H11137) is provided by China Securities Index Co., LTD (the “Index Provider”). The Index is designed to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors, as defined by the Index Provider, and are listed outside of mainland China, including in Hong Kong. A China-based company is a company that meets at least one of the following criteria: 1) the company is incorporated in mainland China; 2) its headquarters are in mainland China; or 3) at least 50% of the revenue from goods produced or sold, or services performed in mainland China. The Index Provider then removes securities that during the past year had a daily average trading value of less than $3 million or a daily average market capitalization of less than $2 billion. One cannot invest directly in an Index.
Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund’s concentrating its investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause prices to fluctuate over time.
Leverage Risk – The Fund obtains investment exposure in excess of its net assets by utilizing leverage and may lose more money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. A total loss may occur in a single day even if the Index does not lose all of its value. Leverage will also have the effect of magnifying any differences in the Fund’s correlation with the Index and may increase the volatility of the Fund.
Daily Index Correlation Risk – A number of factors may affect the Fund’s ability to achieve a high degree of correlation with the Index and therefore achieve its daily leveraged investment objective. The Fund’s exposure to the Index is impacted by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day.
Chinese Securities Risk – Chinese securities are subject to the risks of government involvement, concentrated issuers, more frequent trading halts, low volume and volatility, higher dept levels, less-developed laws and regulations, being export driven and highly reliant on trade as well as security concerns, such as terrorism and strained international relations.
Internet Company Industry Risk — Internet securities may fall in and out of favor with investors rapidly, and are subject to rapid changes in technology, worldwide competition, rapid obsolescence of products and services, loss of patent protections, evolving industry standards and frequent new product productions.
Information Technology Sector Risk — The value of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence, government regulation, and competition, both domestically and internationally, including competition from competitors with lower production costs.
Additional risks of the Fund include Effects of Compounding and Market Volatility Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs Risk), Cash Transaction Risk, and Passive Investment and Index Performance Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
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