(Bloomberg) -- As Chinese markets lose momentum, stock speculators have found a new craze to whip up action in the country’s equity market: artificial intelligence.

This week’s trigger was Baidu Inc.’s announcement it would roll out a ChatGPT-like service. The news created a buying frenzy across stocks in the industry — even those with tenuous AI links — prompting at least two warnings from Chinese state media. Investors hunting for opportunities inundated companies with queries on whether they were developing similar technologies.

But anything that smells like meme-stock behavior is frowned upon by Beijing — see how regulators handled moments of excess in 2021 and 2019 — and the trade may be on the verge of collapsing. Watch out for stronger rhetoric in the coming weeks as authorities juggle the need to kickstart the economy while managing inflation and keeping financial risk and leverage in check. 

These same challenges rattled China’s repo market this week, forcing the People’s Bank of China to smooth things over by injecting more than 1 trillion yuan ($147 billion) into the financial system in just three days. The moves in money markets call to mind events two years ago, when the PBOC engineered a massive cash squeeze in the middle of the pandemic. Excess liquidity then was making its way into a popular bond-market carry trade and had sent a gauge of domestic stocks to near a record before flowing on into Hong Kong’s shares.

Here’s my roundup of the week’s key developments for China markets. 

ChatGPT mania

Potentially China’s most prominent entry in the race to create life-like AI bots will come from Baidu, with a service to be named “Wenxin Yiyan,” or “Ernie Bot” in English. Baidu has spent billions of dollars researching AI in recent years as it attempts to transition from online marketing to deeper technology. 

  • Baidu Surges as Hope Mounts Over Chinese Answer to ChatGPT

Credit demand

China’s post-Covid reopening has brought the interbank lending market back to life, with money-market rates surging. Data showed consumer prices also picked up, rising 2.1% in January from a year earlier. Still, the question is whether consumers will deploy excess savings built up during the pandemic. Inflation in China remains relatively benign and economists predict it will stay well below 3% this year.

  • China Funding Costs Surge as Loan Demand Jumps on Reopening
  • China’s Consumer Inflation Picks Up as Recovery Gathers Pace

Tech revival

Meituan went against the layoff trend among tech companies, announcing plans to hire as many as 10,000 people this quarter. Investors didn’t like the idea, with the stock falling about 14% this week. Meanwhile, Tencent Holdings Ltd. will release a new esports league in a sign that China’s online gaming industry is making a comeback.

  • Tencent Plans ‘Valorant’ League as Gaming Crackdown Eases
  • China Tech Giant Meituan Hires 10,000 to Counter ByteDance

Carry trade

Borrowing in Hong Kong dollars to buy the higher-yielding greenback is a profitable trade again. That’s because Hibor (Hong Kong interbank borrowing costs) is dropping while Libor (the comparable rate for the US dollar) is surging, resulting in the widest yield gap since 2007. Because the city’s currency is pegged to the greenback, the trade is as simple as: short HKD, long USD and pocket those basis points. 

  • HK Dollar Carry Trade Flares on Widest Yield Gap Since 2007

The balloon

President Joe Biden told PBS NewsHour that US-China relations had not taken a big hit after the US shot down a suspected Chinese spy balloon. That’s contrary to mounting evidence of frayed ties: After Secretary of State Antony Blinken canceled his trip to China, the Pentagon asked to speak with China’s defense chief and Beijing refused. China’s foreign ministry also condemned Biden for saying President Xi Jinping faces “enormous problems.”

  • Pentagon Says China Refused to Take Call Over Balloon Uproar
  • China Balloon Was Part of a Global Spying Effort, Blinken Says
  • China’s Balloon Was Able to Spy on Communications, US Says

Ideological showdown

Presidents Xi and Biden gave speeches laying out their visions for their respective countries, with both emphasizing self-strengthening. Xi focused on the domestic situation and pushed “Chinese-style modernization” to reject Western models of development. Biden had a whole section on competing with China. 

  • Xi Rejects Westernization in Show of Faith in Self Reliance
  • Biden Taunts Xi Days After Shooting Down Chinese Balloon

... and two things to watch for next week

  • Wednesday’s monthly medium-term lending facility operation will be closely-watched for signs of where the central bank stands on liquidity. Additional funding is expected, consensus shows, but no rate cut.
  • The Hang Seng Tech index is hovering near a key support level at the 50-day moving average. Holding above that line next week would be a bullish sign for chart-watchers.

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