Jefferies Predicts Strong Growth in Chinese AI Stocks Amid Narrowing Valuation Gaps

Key Points Summary:

• Jefferies sees significant potential for further gains in Chinese artificial intelligence stocks, supported by narrowing valuation gaps with U.S. counterparts and increased capital expenditures.

• The market capitalization of Jefferies' selected Chinese AI stocks surged by approximately $732 billion, or 88%, since January 2025, yet still represents a small fraction of global AI market value.

• Improved model performance and a recent government initiative to promote AI in industries could catalyze higher valuations and earnings growth in China’s AI sector through 2026.

Jefferies forecasts considerable upside for Chinese artificial intelligence stocks, citing a diminishing valuation gap with U.S. firms, fueled by increasing capital outlays, enhanced model efficacy, and supportive policy frameworks. In a recent research report, Jefferies analysts emphasized that China's AI industry remains in the initial monetization phase compared to its U.S. counterparts, indicating that while recent re-ratings have been sharp, substantial additional growth potential remains as earnings begin to catch up.

The market capitalization of Jefferies’ selected basket of Chinese AI stocks has surged approximately $732 billion, or 88%, since January 2025, reaching an estimated total of $1.8 trillion. However, despite this rally, these stocks only represent around 6.5% of the market capitalization of global AI peers, increasing to roughly 8% when major private firms are considered.

Moreover, Jefferies analysts observed that capital expenditures related to AI from China’s hyperscalers are projected to be about 18% of U.S. spending during 2023–2025, with expectations of further increases. This suggests that current valuations might not yet fully incorporate the intensity of investments in the sector.

The report also noted a reduction in performance disparities between leading Chinese and U.S. AI models, with the gap narrowing from 8% to approximately 6%. This improvement is attributed to recent advancements, including Zhipu AI’s introduction of GLM 4.7, which has enhanced the competitiveness of domestic large language models.

At a more granular level, Jefferies pointed out that Chinese cloud service providers, AI software firms, and data center companies are trading at discounts relative to their U.S. counterparts, while integrated circuit design and semiconductor equipment stocks maintain valuation premiums. A newly announced government initiative aimed at accelerating AI integration across manufacturing and service sectors has further bolstered sentiment. The firm added that forthcoming IPOs and an anticipated stronger delivery of earnings could further re-rate China’s AI stocks into 2026.