Chinese Tech Stocks Plunge Into Bear Market Territory

20%. That's how far Hong Kong-listed Chinese technology stocks have fallen from their October peak, officially entering bear market territory on Thursday. The Hang Seng Tech Index dropped over 1%, marking its sixth consecutive session of declines.

What started as a stellar 2025 rally has quickly turned into a rout, leaving investors questioning whether this is a temporary setback or the beginning of something more serious.

Tax Fears Trigger the Selloff

The immediate catalyst for this dramatic reversal? Fears of a potential value-added tax increase on internet services. Recent VAT hikes on certain telecom services have spooked investors, who worry that internet platforms could be next in line for higher taxes.

"The sell-off in recent days is driven by concerns over possible VAT tax increase on internet services, online gaming and other online transactions," explained Qi Wang, investment strategist at UOB Kay Hian.

Speculation briefly extended to online gaming and digital transactions, amplifying fears of fresh policy headwinds for a sector that's already endured years of regulatory tightening. While Chinese officials dismissed gaming tax rumors on Tuesday, the damage to investor confidence was already done.

Global AI Anxiety Adds Fuel to the Fire

The Chinese tech selloff hasn't happened in isolation. Global technology markets have been rattled by concerns about AI-driven disruption to traditional software companies.

"To me it's a barrage of negative news globally," said Phelix Lee, senior equity analyst at Morningstar. Reports of Anthropic rolling out AI plugins that automate legal work have sparked fears in legaltech firms, contributing to a broader software selldown.

Meanwhile, reports of tensions between Nvidia and OpenAI have added to the risk-off sentiment in hardware AI trades, creating a perfect storm of negative sentiment across the tech sector.

Correction or Deeper Downturn?

Despite the sharp decline, some market observers view this as a healthy correction rather than the start of a prolonged bear market. The weakness appears concentrated in sectors that had previously outperformed, according to Morningstar analysis.

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

Vey-Sern Ling, managing director at Union Bancaire Privée, remains optimistic about the fundamental outlook: "Fundamentally nothing has changed to derail our positive outlook for Chinese tech stocks. Valuations continue to be supportive, sector earnings have potential to rebound, and AI may provide a stream of catalysts ahead."

The Bigger Picture

This selloff highlights the fragile nature of investor sentiment toward Chinese tech stocks. Despite strong fundamentals and attractive valuations, the sector remains vulnerable to regulatory concerns and global risk-off sentiment.

For global investors, the question isn't just about Chinese tech stocks—it's about how to navigate an increasingly volatile technology landscape where AI disruption, regulatory uncertainty, and geopolitical tensions intersect.