The Hang Seng Tech Index has shed more than $350 billion in market value since a March high, though it has gained more than 10% over the past four sessions. While China’s rapid AI development remains a key positive, heightened geopolitical tensions are at the forefront at the moment.

U.S. actions against China such as restrictions on financial holdings or further sanctions are a “serious risk,” according to Bush Chu, an investment manager at Aberdeen Investments. There has also been unverified chatter over potential forced delistings of Chinese stocks from U.S. exchanges, and some fear further restrictions on technology access.

Such measures could cause a “sharp selloff” of heavily foreign-owned China tech stocks, Chu said. “I think a lot of things are not yet priced in,” he said, also highlighting the broader impact on demand if tariffs weaken China’s overall economy.

China’s economy may suffer broadly from Trump’s aggressive hike in tariffs to 145% and the decoupling of the two nations. At the same time, the sector’s high index weightings and foreign ownership have broad ramifications for China’s markets.

With the U.S. raising tariffs applied to small parcels that were previously exempt from duties, Chinese e-commerce firms have been hit hardest. American depositary receipts of Temu owner PDD Holdings Inc. have slumped 25% since the start of April. ADRs of Alibaba Group Holding Ltd., the largest Chinese firm listed in the U.S., are down 21%.

The direct tariff impact is seen as small outside of online shopping, with the majority of China tech’s revenue and profits coming from domestic business. But non-tariff means may be deployed as well as tensions ramp up.

In February, the Trump administration released a policy memo that potentially calls into doubt the mechanism for Chinese listings in the U.S. That reminded investors of episodes in 2021 and 2022, when the specter of mass delistings from U.S. exchanges dragged on China’s markets.

“Given how high Trump already has pushed up tariffs against China, we believe delisting is moving up in the list of retaliatory options,” TD Cowen analyst Jaret Seiberg wrote in a note dated Wednesday. “That means risk is higher this week than last week for action.”

The U.S. Department of Defense has already blacklisted Tencent Holdings Ltd., China’s largest company by market cap, and others. While the Pentagon’s list carries no specific sanctions, it discourages U.S. companies and agencies from dealing with these Chinese firms.

The options market shows investors are nervous. The cost of hedging against declines in Chinese tech giants like Tencent and Alibaba remains near multi-year highs, after soaring the most among Hang Seng China Enterprises Index companies in the recent rout.

China’s tech stocks had been all the rage earlier this year as DeepSeek’s success drove investors into the nation’s listed AI plays. The worsening trade war has shifted attention back to U.S. efforts to limit Chinese access to the most cutting edge tech.

“While we are not sure whether the U.S. plans to announce any new restrictions on chip export, there have been concerns that tech companies that have cloud services and proprietary AI foundation models/capability could be under scrutiny and sanction,” Citigroup Inc. analysts including Alicia Yap wrote in a note. This could put pressure on Tencent, Alibaba and Baidu Inc., they added.

The sector still has valuation appeal, with the Hang Seng Tech Index trading at 15 times estimated forward earnings, below its three-year average level of 19 times and the Nasdaq 100 Index’s current level of 24 times.

The cohort’s heavy reliance on domestic demand also puts them in line to gain from Beijing’s efforts to support the economy.

“Chinese tech leaders are still relatively attractive,” said Aberdeen’s Chu. “Whether investors want to get into China stocks right now just to capture the AI opportunities … they may pause a bit for now given the great uncertainties, and they might re-enter if they obtain more clarity on the tariff, on the global economy.”