(Bloomberg) -- Chinese retail investors don’t have Reddit. But they do have something else just as associated with stock market hype: exchange-backed Q&A platforms. In recent weeks, these forums were buzzing about one thing: The likely winners as China builds out an alternative AI ecosystem. 

Since February, users have peppered listed companies on the Shanghai and Shenzhen exchange boards with over 11,000 AI-related queries, according to data complied by Bloomberg News. 

But this isn’t just talk about obvious trades like suppliers to Huawei Technologies Co. Instead, the hunt is on for more obscure beneficiaries, who might be able to utilize AI advances in real world applications. 

Many of these seem a stretch. One trader asked whether Ningbo Peacebird Fashion Co., a woman’s apparel distributor, is using AI in its fashion designs. Another whether Ceepower Co., which makes power distribution systems, is planning to launch charging stations designated for AI devices. How about Zhejiang Shapuaisi Pharmaceutical Co., an eye drop maker. Will its product help users better read the text generated by AI assistants? 

(Companies aren’t obliged to reply to the questions and none of the above did.) 

Yet both the sheer volume and scattergun nature of the comments show how urgently local investors, who are mostly barred from directly buying shares in overseas players like Nvidia Corp., are searching for an alternative way into the AI trade.

With a massive tech savvy local base the hope is that China companies can still emerge as winners in products, despite stringent US sanctions on cutting edge chips. Think how the US might have built the Internet, but Tencent Holdings Ltd. created the ubiquitous WeChat app, now central to modern Chinese life.

“We don’t underestimate how AI can make transformative changes to its economy,” said Nicola Lai, investment manager for Hong Kong & China equities at Barings. “China has the depth of data given its sheer size of population in allowing AI applications to take off.” 

Getting Lucky

Already the hunt for homegrown AI pioneers has created some unlikely stock market surges. 

State-owned production Shanghai Film Co. gained more than 70% in six weeks, after revealing plans to use generative AI to create animation in traditional Chinese art styles. Astro-century Education & Technology Co., which publishes textbooks, gained 64% over the same period, after unveiling an AI powered teaching assistant app. Hunan TV & Broadcast Intermediary Co., jumped over 100% after an affiliate announced that a machine had taking a role in directing a reality TV show.

Not all of these gains have lasted. Hunan TV, for example, has given back half its gain after the program about three celebrities going on road trips failed to gain traction and it divulged little detail on exactly how AI was involved.

Overall, the CSI Artificial Intelligence Index has rallied nearly 30% from its nadir in early February before Open AI’s demonstration of its Sora AI model, which can turn written prompts into video, sparked a new hunt for China’s AI winners. Still, it’s  down about the same percentage from the June 2023 high reached after the launch of ChatGPT. 

Built on Stories 

The risk getting carried away by a stock built on a story, not solid foundations, is one reason why professional fund managers are often deeply wary of this new wave of AI application trades. Many reaped rewards last year investing in servers and hardware that would be needed in training large language models and see this latest surge in interest as pure speculation. 

Such frenzies have a long history in China's stock market, as retail investors seek quick returns on the latest hot trend, from free-trade zones to real estate investment trusts. In 2021, shares linked to the development of the metaverse surged, including digital content provider AVIT Ltd. and gaming company Shenzhen ZQGAME Co. The two stocks have since fallen more than 60% from their highs.

“These AI trades look to me less convincing than the metaverse craze a few years ago,” said Shi Junbo, a fund manager at Hangzhou XiYan Asset Management Co. “There’s no comparison between the AI stocks in China and the type of earnings boost that Nvidia can enjoy.”

This year, mom and pop investors — burnt by the housing downturn and years of under-performance in the general stock market — also poured funds into an exchange-traded fund that owns gold companies as well as US and Japanese stocks via domestic fund products.

Still, for many the prospect of getting in early in a transformative market such as AI is compelling.

In China, the best proxy to measure retail ownership of a stock is a change in the number of shareholders, with growth indicating more small-time holders are buying in. Many of the hot button stocks of the past month show exactly this pattern. 

Zhejiang Huace Film & Television Co., a producer of TV dramas for example, saw its shareholder base jump by 10% in less than 10 days, according to the most recent data disclosed at the end of February. The company's shares later nearly doubled in a month after the company said it could generate four seconds of story boarding video from text, before the stock fell back.

Li Zhuoyu, who owns a tea business in Yunnan Province, is well aware of the risks of stock market hype. But the sheer potential scale of the market means he feels the need to have some exposure to the AI rally – in his case via a managed portfolio.

"Speculation is definitely a large part of the AI trade,” said Li. Yet he does see a chance for China to get ahead, especially around AI-generated short videos.  “We do have the huge user base that is a prerequisite for this.”

©2024 Bloomberg L.P.