China Tech Stocks Surge as Wall Street's $3 Trillion AI Rout Deepens, but US Still Leads the AI Arms Race

HONG KONG — Chinese technology stocks staged their strongest rally in nearly two years this week as global investors fled American and Asian chipmakers, but analysts say the market rotation does not change a basic reality: the United States still holds a commanding lead in the infrastructure and capital driving the artificial intelligence race.

The divergence emerged after Democrats won control of the U.S. Congress in Tuesday's midterm elections, raising fears that tighter regulation and local opposition could slow the American data center buildout.

A historic rout on Wall Street

The selling in the United States was severe. The Nasdaq fell about 5% on Thursday and the S&P 500 nearly 4%, just a day after Wall Street had cheered the Democratic sweep of Congress. By the close, U.S. stocks had shed roughly $3 trillion in market value, and the Dow was heading for its worst second trading day after a midterm in data going back to 1896.

Chipmakers bore the brunt. The Philadelphia Semiconductor Index slumped 12.2%, and the Nasdaq has now shed 12% from its record high close a month ago.

The selloff marked the steepest decline in U.S. stocks since the tariff-triggered "Liberation Day" rout in April 2025.

Analysts said investors were rethinking the outlook for AI spending. Charles-Henry Monchau, chief investment officer at SYZ Group, told the Financial Times, "With the blue wave, investors fear that peak [AI capital spending] is behind us."

China's internet giants rally

Hong Kong moved in the opposite direction on Thursday. The Hang Seng Tech Index climbed 5.6%, its biggest gain since February 2025, while the broader Hang Seng Index jumped 3.7%, with Alibaba and Tencent among the biggest drivers.

The gains reflected a shift in strategy rather than a broad bet on Chinese hardware. Investors rotated away from hardware stocks into discounted Chinese internet platforms. The move sparked one of the biggest short squeezes in years.

Mainland markets also rose. Shanghai's tech-focused STAR50 index rose 2.11% by the lunch break, while the Shenzhen index gained 1.69%.

Part of the appeal is structural. Chinese tech stocks are less dependent on U.S. capital spending than their Korean and Taiwanese counterparts.

Analysts see differences even within China's tech sector. Zhao, an analyst cited by Reuters, said "China's domestic technology supply chain may become further differentiated," adding that hardware exporters dependent on U.S. AI capex may be affected, while GPU, chip equipment and computing infrastructure firms may benefit from China's push for technological self-reliance.

Asian chipmakers hammered

Asia's hardware-heavy markets fared far worse on Friday. South Korea's KOSPI fell more than 8% to trigger a circuit breaker, Japan's Nikkei slumped 6% and Taiwan was down more than 8%.

Samsung Electronics fell nearly 10%, SK Hynix slid 11.7%, Kioxia plunged 14% and TSMC was down 8.5%.

The selling looked disorderly. "There is also clearly an element of panic in the selling," said Charu Chanana, chief investment strategist at Saxo.

Hong Kong's rally also looked fragile on Friday. The Hang Seng Index fell 392 points, or 1.58%, at Friday's open. Analysts had warned that a broad global risk-off move could test the durability of Thursday's gains.

Market strategists see a shift in sentiment. "It's pretty clear there's been a real shift in sentiment," said Michael McCarthy, chief executive for Australia and New Zealand at online brokerage Moomoo.

China's own AI bubble

The rotation comes after Chinese AI stocks suffered their own steep correction. China's AI stock rally collapsed in late October, wiping out about $480 billion as the STAR50 index of AI and chip companies fell 40% from its July high.

Valuations remain elevated. Even after the crash, the STAR50 traded at about 100 times past earnings, compared with about 30 times for the Nasdaq 100.

US still leads on key measures

Despite the market turmoil, independent research shows the United States retains significant advantages in the AI race.

Stanford University's 2026 AI Index found the gap in model performance has narrowed sharply. "The US-China AI model performance gap has effectively closed," the report said, noting that models from both countries "have traded the lead multiple times since early 2025."

But the United States dominates in capital and infrastructure. The top U.S. model led its nearest Chinese rival by 2.7% as of March 2026, with the U.S. spending $285.9 billion on private AI investment compared with China's $12.4 billion. The U.S. also leads in compute infrastructure, with 5,427 data centers.

In 2025, the United States released 50 leading AI models, compared with 30 from China.

China leads in other areas. "China leads in publication volume, citations, patent output, and industrial robot installations," the Stanford report said.

Another estimate puts the gap in time. The Institute for Progress estimates the top U.S. AI models lead top Chinese models by about 6.5 months, despite U.S. companies having significantly better compute access and financing. The think tank estimates that a 16-fold U.S. advantage in training compute would yield a 13-month lead without distillation of U.S. models.

Chip access remains a constraint

China continues to face hurdles in securing advanced hardware. Nvidia chips have been piling up in Hong Kong as China withholds import approval.

What's next

Investors are now weighing whether the U.S. selloff marks a temporary shakeout or the start of a longer correction. The political jitters are hitting an AI trade already on shaky footing over worries about returns on the enormous sums being invested in the technology.

For China, analysts say the durability of this week's rally will depend on earnings and geopolitics. Its staying power will hinge on earnings delivery and on whether U.S.-China relations genuinely improve.