China is ramping up its efforts to be self-sufficient in technology, focusing on areas like AI, semiconductors, aerospace, and clean energy. The country’s fourth plenum has unveiled a five-year plan to transform the economy into a modern industrial powerhouse. The National Development and Reform Commission emphasizes that technological progress is vital.

Valuation Concerns

Although tech stocks initially saw a boost, valuations are raising alarms. The Hang Seng Tech Index has risen 35% this year, mainly driven by sentiment rather than actual earnings. Bloomberg forecasts a 25% decline in earnings per share (EPS) for the Hang Seng Tech in 2025, followed by a 44% recovery in 2026. Future growth will hinge on whether domestic chipmakers can turn policy support into profits. Chinese tech companies are aligning their strategies with national goals through the “AI Plus” initiative, which seeks to integrate AI into various sectors to enhance productivity. This focus could lead tech platforms to prioritize national interests over short-term profits. Investors should look for profitable tech leaders linked to government policies but remain aware of risks such as disappointing earnings and geopolitical tensions. The market needs actual profits, not just promises of policy support, for sustained growth. We’ve witnessed a strong rally in Chinese tech this year, with the Hang Seng Tech Index up 35% due to optimism surrounding policies. However, these gains have driven valuations to high levels, particularly with a 25% earnings drop predicted for 2025. The coming weeks will determine if this optimism is warranted or if it’s simply a bubble driven by sentiment. Valuations for key chipmakers like SMIC are now close to 80 times forward earnings, making downside protection essential. We suggest buying put options on wide tech ETFs, such as the Hang Seng Tech Index ETF (3067.HK), as a smart strategy before the Q3 earnings season. This approach allows traders to protect long positions or bet on a market correction if companies fall short of high expectations.

Economic and Geopolitical Risks

The broader economic conditions add to this caution. China’s Q3 GDP growth of 4.8% was just below expectations, showing that the domestic recovery is still weak. This overall economic challenge makes it tougher for tech companies that rely on growth to achieve the revenue increases that their stock prices suggest. Uncertainty is rising, presenting an opportunity for traders focusing on volatility. Implied volatility on Hang Seng Tech options has increased above 40%, highlighting market worries about earnings and policy execution. This scenario indicates that strategies like long straddles could be useful, as they benefit from significant price movements in either direction. The geopolitical situation introduces more risk, especially with recent talks in Washington hinting at possible new restrictions on semiconductor equipment exports. We saw how similar news led to sharp declines in the sector in 2022 and 2023. Maintaining unhedged long positions during this tense period could be excessively risky. Despite a generally cautious outlook, there may be targeted opportunities in companies with strong balance sheets and confirmed government contracts from last year’s “AI Plus” initiative. For these specific companies, selling out-of-the-money put spreads could generate income. This strategy takes advantage of high implied volatility while managing risk, but it requires selecting the few firms capable of turning policy into real profits. Create your live VT Markets account and start trading now.

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