Discover how China’s state-driven tech revolution is turbocharging ETF returns and positioning its tech giants to outpace U.S. innovation over the next five years.
A Two-Month Performance Gap
Over the past 60 days, Chinese technology stocks have staged a sharp rally, handily beating their U.S. counterparts. The Invesco China Technology ETF (CQQQ), which tracks major Chinese tech firms, has surged by double digits since the start of the year. As of early February 2025, CQQQ was up about 13.5% year-to-date (China Tech ETFs Surge As DeepSeek-Led AI Boom Fuels Bull Market), and it has continued climbing through February. In contrast, the Invesco Nasdaq 100 ETF (QQQM) – a fund mirroring the tech-heavy Nasdaq-100 index of U.S. giants – has barely budged in the same period, with roughly a 0.7% gain year-to-date (QQQ vs. QQQM — ETF comparison tool, PortfoliosLab). This stark discrepancy means that Chinese tech stocks (as captured by CQQQ) have outperformed U.S. tech stocks by a wide margin in the last two months.
Several recent market trends help explain this gap. Chinese equities have been rebounding strongly from a tough 2022-2023 period, and investor sentiment toward China’s tech sector has turned positive. In fact, Hong Kong’s Hang Seng Tech Index – a benchmark for China’s top tech shares – jumped over 20% into a bull market in early 2025 (China Tech ETFs Surge As DeepSeek-Led AI Boom Fuels Bull Market). This rebound added over $1.3 trillion in value to Chinese markets in just a month, even as some other emerging markets (like India) saw declines (ETFs to Bet Big on China Amid Fund Rotation - February 19, 2025 - Zacks.com). By comparison, U.S. tech stocks entered 2025 after a massive rally last year and have traded more sideways amid profit-taking and macroeconomic caution. The result: CQQQ’s holdings are on a tear, “obliterating” the returns of Nasdaq’s QQQM this year (China’s Tech Stocks Obliterate America’s By An Embarrassing Amount), much to investors’ surprise.
Catalysts Behind China Tech’s Rally
Cutting-Edge Innovation: A key driver of CQQQ’s recent strength is excitement over breakthroughs in Chinese technology – especially in artificial intelligence. In late January, a Chinese AI startup called DeepSeek stunned the industry by releasing a low-cost AI model that rivaled top Western AI systems at a fraction of the cost (DeepSeek’s outside funding draws interest from Alibaba, Chinese state funds, The Information reports, Reuters). DeepSeek’s AI model, named R1, reportedly cost only about $5.6 million to train, versus an estimated $100 million for OpenAI’s GPT-4 (ETFs to Bet Big on China Amid Fund Rotation - February 19, 2025 - Zacks.com). This achievement has galvanized investor enthusiasm around China’s AI sector. Chinese tech ETFs spiked after DeepSeek’s debut; for example, the KraneShares China Internet ETF (KWEB) jumped 14% in a few weeks following DeepSeek’s rollout in late January (China ETFs draw bullish options bets on AI play and eased tariff fears, Reuters). Major Chinese tech companies like Baidu and Tencent even integrated DeepSeek’s AI into their cloud platforms, fueling their stock surges and lifting CQQQ along with them (China Tech ETFs Surge As DeepSeek-Led AI Boom Fuels Bull Market). The buzz is that DeepSeek’s success could give China an upper hand in the intensifying U.S.–China tech race (China ETFs draw bullish options bets on AI play and eased tariff fears, Reuters), prompting a wave of investment into Chinese AI names.
Policy Support and Stimulus: Beyond specific companies, broader economic and policy factors have created a favorable backdrop for Chinese tech. After a period of regulatory crackdowns on tech giants from 2020–2022, Beijing has pivoted to a more supportive stance. There are signs of rapprochement with private tech firms – for instance, China’s President Xi Jinping recently met with top entrepreneurs, including Alibaba co-founder Jack Ma and DeepSeek founder Liang Wenfeng, to emphasize bolstering the economy and advancing technology (DeepSeek’s outside funding draws interest from Alibaba, Chinese state funds, The Information reports, Reuters). This signals that the era of harsh tech regulation in China may be giving way to an era of collaboration and growth. Investor confidence in China’s “investability” has accordingly improved (ETFs to Bet Big on China Amid Fund Rotation - February 19, 2025 - Zacks.com).
At the same time, Chinese authorities have rolled out significant economic stimulus measures to boost growth. These include interest rate cuts, home-buying incentives, and new capital market funding programs (ETFs to Bet Big on China Amid Fund Rotation - February 19, 2025 - Zacks.com). Such pro-growth policies are particularly bullish for tech stocks, which thrive in lower-rate, high-liquidity environments. Expectations of further stimulus are drawing investors back to one of the world’s previously most beaten-down markets (ETFs to Bet Big on China Amid Fund Rotation - February 19, 2025 - Zacks.com). In short, China’s government is leaning in to support the tech sector’s expansion – a stark contrast to a couple of years ago, and a positive catalyst that U.S. tech stocks don’t currently enjoy to the same degree.
Valuations and Rotation: Another factor is valuation and global portfolio rotation. Chinese tech equities entered 2025 at much lower valuations than U.S. tech giants. Even after the recent run-up, the Hang Seng Tech Index trades around 17 times forward earnings, versus about 27 times for the Nasdaq-100 (China Tech ETFs Surge As DeepSeek-Led AI Boom Fuels Bull Market). This relative cheapness suggests room for further price appreciation (China Tech ETFs Surge As DeepSeek-Led AI Boom Fuels Bull Market), attracting value-oriented investors. In fact, global hedge funds have been shifting funds into China at the fastest pace in months – even pulling money out of other markets like India – to capitalize on China’s tech rally (ETFs to Bet Big on China Amid Fund Rotation - February 19, 2025 - Zacks.com). Analysts at Deutsche Bank noted that China’s innovation-fueled resurgence could force global investors to sharply raise their exposure to Chinese stocks despite geopolitical risks (China Tech ETFs Surge As DeepSeek-Led AI Boom Fuels Bull Market). In their view, China may be “outcompeting the rest of the world” in tech in 2025 (China Tech ETFs Surge As DeepSeek-Led AI Boom Fuels Bull Market). While that claim may be bold, it underscores a real trend: investors see more upside in China’s tech sector right now, whereas U.S. tech valuations already reflect a lot of optimism (after 2023’s AI-driven boom in U.S. stocks). This valuation gap and reallocation of capital have boosted CQQQ’s performance relative to QQQM.
State-Driven Growth vs. Market-Driven Growth
Underpinning this divergence is a fundamental difference in how China and the U.S. foster their technology industries. China’s economic model – often described as “socialism with Chinese characteristics” – gives the state a leading role in guiding and funding high-tech development. In practice, this means centralized planning and government-directed investment in strategic sectors. For example, Beijing has established national programs and targets for technologies like AI, semiconductors, and clean energy. The results are massive resource mobilization: China is reportedly preparing a 1 trillion yuan (≈$143 billion) support package for its semiconductor firms over five years (Exclusive: China readying $143 billion package for its chip firms in face of U.S. curbs, Reuters), mainly as subsidies and tax credits to accelerate chip production and innovation. This kind of direct state funding is a hallmark of China’s approach. Likewise, China’s government has built entire innovation infrastructure – from national AI research labs to state-backed venture funds – to ensure tech firms can scale swiftly.
The United States, by contrast, relies far more on free-market dynamics and private enterprise to drive innovation. Technological progress in the U.S. is largely spearheaded by big private companies, startups, and venture capital, with relatively limited government direction. “China’s strategy is characterized by centralized planning… In contrast, the U.S. has primarily relied on private enterprises to drive AI advancements,” as one global tech analyst notes (Stakes Rising In The US-China AI Race, Global Finance Magazine). U.S. government support for tech tends to be indirect or modest – for instance, through basic research grants or the recent CHIPS Act ($52 billion for domestic chip manufacturing) (Exclusive: China readying $143 billion package for its chip firms in face of U.S. curbs, Reuters). But these efforts pale in scale next to China’s state-driven investments. China’s long-term planning (through its Five-Year Plans and initiatives like Made in China 2025) allows it to pour resources into priority tech fields in a coordinated way, whereas the U.S. approach is more decentralized and market-driven.
Over the next five years, this divergence in approach could significantly shape the fortunes of Chinese vs. American tech firms. Many economists believe China’s state-led model gives it a structural advantage in scaling up emerging industries – essentially, the government can create winners by funding them heavily and protecting them until they mature. We’re already seeing this in electric vehicles and batteries: thanks to years of subsidies and industrial policy, Chinese companies like BYD Co. have reached massive scale, selling nearly 1.8 million electric cars in 2024 – on par with Tesla’s sales (largest electric car manufacturer: byd overtakes tesla). In AI, China’s government has declared a goal to be the global leader by 2030, and is backing that ambition with national AI labs and education – a long-term vision that Western nations, often at the mercy of election cycles and market whims, struggle to match (Stakes Rising In The US-China AI Race, Global Finance Magazine). As one expert observes, “China [is] capable of taking a long-term view… this can deliver benefits,” citing its dominance in EVs as an example (Stakes Rising In The US-China AI Race, Global Finance Magazine).
That said, a market-driven system has its own strengths. The U.S.’s competitive free-market environment has produced many of the world’s most innovative companies and breakthrough inventions. American tech giants reinvest billions of their own capital into R&D, and the profit motive drives rapid commercialization of new technologies. Over five years, U.S. firms may remain more agile in certain cutting-edge domains (like software, consumer internet, and advanced chip design), where open competition spurs creativity. Currently, the U.S. still leads in many areas – for instance, in cutting-edge semiconductor equipment and some AI capabilities – and experts agree “the U.S. holds the upper hand at present” in key tech races (Stakes Rising In The US-China AI Race, Global Finance Magazine). However, China’s state-enabled push is narrowing that lead in numerous fields. If the Chinese government continues to execute on its plans, we could witness Chinese tech companies achieving milestones by 2030 that few would have predicted a decade ago. In sum, China’s state-driven approach offers long-range strategic direction and scale, while America’s market-led system offers efficiency and innovation – and the interplay between these models will define the tech landscape of the next five years.
Innovation in AI, Semiconductors, and Green Tech
Recent real-world examples illustrate how China’s development model is propelling specific high-tech sectors – and why investors are excited about Chinese tech firms’ potential.
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Artificial Intelligence: DeepSeek’s rise is the clearest example of China’s rapid innovation. In a span of weeks, this small Hangzhou-based startup disrupted the AI world with its R1 model that matched the performance of Western AI at a tiny fraction of the cost (DeepSeek’s outside funding draws interest from Alibaba, Chinese state funds, The Information reports, Reuters). The company reportedly built its AI using less-powerful domestically available chips yet achieved results comparable to models developed with hundreds of billions of dollars by U.S. giants (DeepSeek rushes to launch new AI model as China goes all in, Reuters). Such efficiency is a game-changer. DeepSeek’s technology has been so impressive that dozens of Chinese companies (and even city governments) are integrating its AI into their products and services (DeepSeek rushes to launch new AI model as China goes all in, Reuters). Importantly, state actors are stepping in to support DeepSeek’s next stage of growth: China’s sovereign wealth funds have approached the startup about investments, and DeepSeek’s founder was invited to high-level meetings with officials (DeepSeek’s outside funding draws interest from Alibaba, Chinese state funds, The Information reports, Reuters) (DeepSeek’s outside funding draws interest from Alibaba, Chinese state funds, The Information reports, Reuters). This blend of private ingenuity and public support exemplifies the Chinese formula. It bodes well for China’s AI ecosystem, which is now attracting global capital and talent. (For comparison, U.S. AI leaders like OpenAI still rely largely on private funding and partnerships, and face more commercial pressure.) Looking ahead, if DeepSeek launches its anticipated R2 model ahead of schedule, as rumors suggest, it could mark a pivotal moment in the AI industry – potentially “breaking the stranglehold” of the few dominant Western players and spreading AI advances more widely (DeepSeek rushes to launch new AI model as China goes all in, Reuters). Such leaps in China’s AI capabilities are a key reason CQQQ has outperformed, as investors bet on China gaining the upper hand in the AI race (China ETFs draw bullish options bets on AI play and eased tariff fears, Reuters).
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Semiconductors: The semiconductor sector is another battleground where Chinese firms are striving to innovate despite headwinds. U.S. export restrictions on advanced chips have been a challenge for China’s tech industry, but they have also spurred a push for self-sufficiency. The Chinese government’s huge $143 billion chip initiative (Exclusive: China readying $143 billion package for its chip firms in face of U.S. curbs, Reuters) is aimed at vaulting domestic chipmakers ahead over the next five years. We’re already seeing progress: China’s top chip manufacturer, SMIC, reportedly developed a 7-nanometer chip process, and tech giant Huawei surprised observers by releasing new smartphones with in-house advanced chips, signaling that Chinese tech can find creative ways around U.S. curbs. From an investor’s perspective, these efforts suggest Chinese semiconductor and hardware companies could gain market share domestically (given strong state backing) even if they remain behind cutting-edge U.S. and Taiwanese chips for now. CQQQ’s portfolio includes firms involved in chip design, electronics, and 5G equipment – all areas where China is investing heavily. Ambitious national support schemes, coupled with strong demand for tech, are accelerating indigenization and intensifying global competition in these sectors (China’s Role in the Global Tech Race – CKGSB Knowledge). In short, China is determined to build its own semiconductor supply chain, and that long-term strategic drive gives investors confidence that Chinese tech hardware companies will see robust growth (with government contracts, subsidies, and a huge home market) regardless of U.S. policies. Meanwhile, American chipmakers in QQQM (like Nvidia or AMD) face the uncertainty of losing access to the China market due to export controls – a risk factor that doesn’t apply to Chinese firms within China. This asymmetry is another reason for CQQQ’s recent strength.
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Green Technology: China has also taken a commanding lead in various green technologies, thanks to years of state-guided expansion. In electric vehicles (EVs), as noted, China’s BYD has essentially caught up to Tesla in global EV sales (largest electric car manufacturer: byd overtakes tesla) – a milestone achieved with support from China’s industrial policies and a protected home market that allowed local EV makers to scale. BYD and other Chinese EV and battery producers (like CATL) benefit from easier access to capital and a huge domestic demand base encouraged by subsidies and mandates for clean energy vehicles. As a result, China now dominates the battery supply chain and is home to the majority of the world’s top solar panel manufacturers. These companies are on the cutting edge of green tech innovation, from advanced battery chemistries to ultra-efficient solar cells. China’s “future industries” plan explicitly prioritizes next-generation energy tech, including high-efficiency solar and hydrogen power (China’s Role in the Global Tech Race – CKGSB Knowledge), ensuring continuous support for firms in these fields. In the U.S., by contrast, clean tech development relies more on private investment responding to market trends and smaller-scale government incentives (though the recent Inflation Reduction Act is trying to change that). The superior scale and coordination of China’s effort give its green tech firms a structural edge in ramping up production. For investors, this means ETFs like CQQQ capture high-growth companies in EVs and renewables that U.S. indices like QQQM might miss. For instance, while QQQM holds Tesla as a key EV exposure, CQQQ holds Chinese EV makers and suppliers that are growing even faster domestically, shielded from some of the competitive pressures Tesla faces globally. This dynamic – Chinese policy building domestic champions in climate tech – adds another layer to CQQQ’s growth story that QQQM’s U.S. holdings don’t directly share.
Impact of Policy and Geopolitics
No analysis of U.S. vs. Chinese tech is complete without considering geopolitics and regulatory shifts, which affect both markets in different ways. Lately, these factors have subtly favored China’s tech rebound (benefiting CQQQ), though risks remain on both sides.
Trade Tensions and Tariffs: The ongoing U.S.–China trade tensions have been a double-edged sword. On one hand, U.S. tariffs and export bans (especially on semiconductors) pose challenges to Chinese tech companies, potentially cutting off some U.S. components or markets. But on the other hand, investors are learning to live with – and even arbitrage – these tensions. Notably, recent trade headlines have been “less threatening than feared” (China ETFs draw bullish options bets on AI play and eased tariff fears, Reuters), contributing to a relief rally in Chinese shares. There’s a perception that worst-case trade war scenarios (like extreme tariffs) are being avoided or delayed. For example, after aggressive rhetoric, the actual U.S. tariff policy on Chinese goods has been somewhat softer in implementation than initially promised (China ETFs draw bullish options bets on AI play and eased tariff fears, Reuters). This easing of immediate trade fears has reduced risk premia on Chinese stocks. Additionally, China’s response to tech sanctions has been to double down on self-reliance (as discussed with chips). For U.S. tech, the trade tensions mean lost business (e.g. Nvidia can’t freely sell its top AI chips to Chinese clients, a revenue hit) and increased costs (supply chain diversification). So ironically, the trade war environment is pushing China to innovate domestically while forcing U.S. firms to adapt – in the long run possibly leveling the playing field. Still, geopolitical uncertainty is a cloud over both markets: any escalation – such as stricter U.S. export controls or Chinese counter-measures – could roil tech stocks. Investors in CQQQ and QQQM alike are keeping an eye on diplomatic developments, knowing that cooperation or conflict between the two powers on issues like technology transfer, intellectual property, and market access will influence future returns.
Regulatory Shifts: Domestically, regulatory climates have diverged. In China, as mentioned, the government has eased up on the heavy-handed regulations that battered its tech giants (antitrust fines, data security crackdowns, limits on gaming, etc.). That crackdown wiped out hundreds of billions in market value from 2021–2022, but its abatement is now allowing companies like Alibaba, Tencent, and Meituan to focus on growth again. Beijing’s recent moves – such as inviting tech leaders for policy discussions and signaling support for platform companies – have restored a measure of confidence (ETFs to Bet Big on China Amid Fund Rotation - February 19, 2025 - Zacks.com). CQQQ’s constituents are directly benefiting from this more benign policy stance, which reduces regulatory risk discounts on their stock prices. By contrast, in the U.S., big tech firms (like those held in QQQM such as Apple, Microsoft, Alphabet) face a different regulatory outlook: antitrust lawsuits, calls for increased oversight of data privacy, and debates over AI regulation are all simmering. While U.S. regulators are far less likely to impose abrupt, sweeping edicts than China did, there is still a sense that the era of “hands-off” policy for Big Tech is ending. For example, the Federal Trade Commission and Congress have been scrutinizing acquisitions and market power in the tech sector. These shifts haven’t materially hurt U.S. tech stock performance yet, but they add an overhang. Likewise, monetary policy is a factor – the U.S. Federal Reserve’s interest rate hikes in 2024 have particularly weighed on growth stocks, including tech, whereas China’s more accommodative monetary policy is helping its tech firms. All told, China’s tech sector is currently enjoying a more favorable policy environment (pro-growth, pro-innovation) than U.S. tech is, which is another reason investors have piled into CQQQ lately.
It’s worth emphasizing that geopolitical and regulatory conditions can change quickly. An unexpected flare-up in U.S.–China relations or a new Chinese regulation could reverse sentiment just as fast as it improved. For instance, global investors remain wary of geopolitical risks even as they turn bullish on China (China Tech ETFs Surge As DeepSeek-Led AI Boom Fuels Bull Market). A balanced view for investors is to recognize these risks: CQQQ’s outperformance comes with higher geopolitical sensitivity, whereas QQQM’s U.S. holdings have more political stability but perhaps less short-term policy stimulus. Thus far in 2025, the pendulum has swung in China’s favor, boosting CQQQ, but both ETFs will continue to be buffeted by policy decisions and international relations going forward.
Conclusion
The recent outperformance of CQQQ over QQQM underscores how different the narratives are for Chinese and American tech stocks at the moment. In the span of two months, Chinese tech companies – aided by breakthrough innovations like DeepSeek’s AI, supportive government policy, and attractive valuations – have delivered superior gains, while U.S. tech has taken a breather after last year’s surge. Key sectors from AI to green energy show China’s tech ecosystem hitting its stride, often with a helpful push from the state.
For investors, this doesn’t necessarily mean Chinese tech will always outperform U.S. tech, but it reveals the potential when the stars align in China’s favor. Beijing’s model of “socialism with Chinese characteristics” has provided a powerful platform for scaling up high-tech industries, one that’s clearly bearing fruit in the form of new global leaders in AI, EVs, and more. The U.S. model, with its free-market ingenuity, is not out of the race by any means – American companies remain world-class, and the Nasdaq-100 could very well leap ahead again with the next tech breakthrough or if macroeconomic conditions shift. Over a five-year horizon, we may even see leadership seesaw between the two, as China leverages state-driven momentum and the U.S. leverages private-sector innovation.
What’s clear is that the competition is intensifying. Investors will need to watch policy signals and innovation trends on both sides of the Pacific. China’s tech sector is in a high-growth phase supported by strategic national prioritization, while U.S. tech is in a maturing phase looking for the next catalyst. The CQQQ vs. QQQM matchup highlights this contrast. By understanding the reasons behind CQQQ’s recent triumph – and the broader economic and political forces at play – both investors and general observers can gain insight into how state-driven and market-driven models are shaping the future of technology. In a world of shifting trade winds and rapid innovation, diversification and awareness are key. Today, that means recognizing China’s tech renaissance without discounting the innovative power of U.S. markets. The race is on, and for now, CQQQ has pulled ahead – but the long-term contest between Chinese and American tech is just getting started.