Bear Market: Taxation, AI fears drag Chinese tech shares down from peak

Hong Kong–listed Chinese technology stocks slid into bear-market territory on Thursday, February 5, marking a sharp turnaround from last year’s rally, with tax concerns and a broader risk-off mood shaking investor confidence.

The Hang Seng Tech Index, heavily controlled by mainland Chinese technology companies, slid over 1%, pulling the index down by just over 20% from its peak in October. The index has now declined for six consecutive sessions.

Investors pointed to fears of a potential increase in value-added tax on internet services as a key catalyst for the recent sell-off. The concerns follow a VAT hike already implemented for certain telecom services, fueling speculation that online platforms could be next.

That uncertainty briefly spread to online gaming and other digital transactions, adding to the fears of fresh policy headwinds for a sector that has only recently emerged from years of regulatory tightening. However, Chinese officials on Tuesday moved to dismiss speculation of a levy on the gaming industry after tech shares came under pressure.

Qi Wang, investment strategist at UOB Kay Hian, said, “The sell-off in recent days is driven by concerns over possible VAT tax increase on internet services, online gaming and other online transactions.” He added that the worries stemmed from the recent VAT increase on certain telecom services.

The fall in Chinese tech stocks has also coincided with heightened volatility across global technology markets, amid fears that advances in artificial intelligence could disrupt traditional software business models.

Phelix Lee, senior equity analyst at Morningstar, said, “To me, it’s a barrage of negative news globally.” He pointed to reports that Anthropic is rolling out an AI plugin that automates parts of legal work, unsettling legal-technology firms, alongside renewed risk-off sentiment in hardware-linked AI trades following reports of tensions between

Nvidia and OpenAI.

Nevertheless, some investors view the sharp decline as a correction rather than the start of a prolonged downturn. Morningstar said the recent weakness appears concentrated in areas that had previously outperformed the broader Hong Kong and China equity markets.

Lorraine Tan, director of equity research for Asia at the firm, said, “I regard the action as a healthy pullback and it’s largely concentrated in sectors that have probably overshot fair values.”

Some asset managers said the fundamental outlook for Chinese tech stocks remains intact, even as near-term catalysts are limited. Vey-Sern Ling, managing director at Union Bancaire Privée, said, “Catalysts have been somewhat lacking for the sector.”

He added that recent regulatory noise in travel and e-commerce, along with VAT-related concerns, appeared to be specific rather than systemic.

“Fundamentally nothing has changed to derail our positive outlook [for Chinese tech stocks],” Ling said, noting that valuations remain supportive, earnings could rebound, and artificial intelligence may provide future catalysts.

(With Inputs From Agencies)