The once-mighty Tencent Holdings Ltd., long the darling of Chinese investors, now finds itself in the shadows as CXMT Corp. soars to unprecedented heights. The memory chipmaker's ascent has left many wondering if this marks the beginning of a new era in which state-backed and old-economy stalwarts supplant private-sector giants.
The numbers are staggering: CXMT's market capitalization has surpassed half a trillion dollars, a feat previously unimaginable for a company once considered staid. Meanwhile, Tencent, once the poster child for China's tech boom, has seen its market value dwindle by nearly 27%. Alibaba Group Holding Ltd., another behemoth of the mobile era, is down over 16% this year.
It appears that Beijing's efforts to reign in the private sector have finally borne fruit. For years, the government allowed companies like Tencent and Alibaba to grow unchecked, but a crackdown in 2020 marked a turning point. As a result, investors are now flocking to state-backed enterprises and hardware companies like CXMT, which has benefited from China's AI infrastructure buildout.
The implications are far-reaching: China's weighting of its hardware sector is expected to surpass that of retailers and software in the MSCI China All Shares Net Total Return Index. Even online retailers like Alibaba and JD.com Inc. have seen their combined weight shrink, while hardware companies have gained traction.
"This is inevitable," said Leonid Mironov, a Hong Kong-based fund manager at Gavekal Capital Ltd. "Look at Tencent's cash flow – it's gone negative, and a lot of it is going to the hardware guys like CXMT. This is the dynamic in the US as well."
The AI boom is driving demand for processors from companies like Nvidia Corp. and fast memory from CXMT, SK Hynix Inc., and Samsung Electronics Co. But software development remains stuck in neutral.
China's government has designated AI infrastructure and robots as key priorities to pursue, develop, and expand. President Xi Jinping has called for game-changing breakthroughs against the backdrop of China's intensifying rivalry with the US for AI supremacy.
Beijing seeks self-sufficiency in critical areas, including software and AI developers like Alibaba – but the industry remains locked in a margin-eroding price war. China has narrowed the gap in areas such as AI model development and inference-processing chips, helped by homegrown champions from DeepSeek to Huawei Technologies Co. However, more pioneers are needed to break new ground in fields like advanced chipmaking for data centers and cognitive AI for the next generation of humanoid machines.
"China's AI build-out will increasingly define equity and IPO leadership across Hong Kong and mainland Chinese markets," said Bloomberg Intelligence senior analyst Francis Chan. "IPO pipelines are AI-led, featuring firms like Moonshot AI, Yangtze Memory, Shein, and Unitree Robotics."
Unitree is expected to begin trading in Shanghai as early as this week, testing the investor community's appetite for AI hardware. CXMT, now three weeks into its life as a public company, is up more than 500% since its debut.
Conviction about China's prospects in the AI race is growing, and new products from companies like Z.AI Co., Alibaba, and DeepSeek support that thesis. However, most bets are landing on hardware providers with greater immediate visibility on revenue and profits.
"If you look at the tech cycle, it is always the hardware set that goes first before the software set can come in," said Kelvin Tay, chief investment officer for Asia at Pictet Wealth Management. "I'm quite sure that at some point this move into software will come back."
Tech stocks have proven volatile in the AI age and sentiment can swing dramatically. Alibaba alone has gone through cycles of optimism and skepticism around its high level of AI spending – alternately seen as a burden or a foundation for long-term growth.
The clearer trend for now is companies aligned with Beijing's priorities, especially if they're making hard-to-get hardware or developing real-world AI applications.
"Valuations are propped up by the idea that self-sufficiency will create a larger total addressable market for those companies," said Morningstar Inc. analyst Jing Jie Yu. "Regulatory uplift or support becomes a consistent valuation push factor for these companies."
As the dust settles, one thing is clear: China's AI build-out has brought about a fundamental shift in the country's tech landscape. The hardware-centric approach has given rise to new winners and losers, and investors would do well to adapt to this new reality.
The question now is whether this represents the beginning of a new era or simply a blip on the radar. Only time will tell.
Written by: Slick Manchetz | The Citizen Edition
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