Chinese defence stocks tumble up to 9% as India-Pakistan ceasefire douses war bets

Chinese defence stocks slumped by as much as 9% on Tuesday as investors unwound bets on an extended conflict between India and Pakistan, following a surprise ceasefire agreement that eased fears of further escalation in South Asia.

The Hang Seng China A Aerospace & Defence Index fell 2.9%, with key constituents AVIC Chengdu Aircraft and Zhuzhou Hongda Electronics Corp plunging as much as 9.2% and 6.5%, respectively. The sharp reversal comes just days after these stocks had surged on expectations of increased Chinese arms exports to Pakistan amid a brief but intense flare-up in hostilities with India.

The market reaction followed a ceasefire announced on May 10, after four days of fierce cross-border missile and drone attacks. “Both India and Pakistan agreed to immediately cease all firing and military operations on land, in the air, and at sea,” according to official statements from both sides.

During the conflict, India launched “Operation Sindoor” targeting terror camps in Pakistan and Pakistan-occupied Kashmir, prompting retaliatory drone strikes by Islamabad. Pakistani forces relied heavily on Chinese-made weaponry, including drones and missiles, most of which were intercepted by India’s air defence systems.

Chinese defence stocks had rallied in the days leading up to the ceasefire, reflecting investor hopes that Beijing would play a key role in arming Pakistan in the event of prolonged conflict. On May 8, AVIC Chengdu Aircraft’s Shenzhen-listed shares soared as much as 16%, while Hong Kong-listed AVIC Aerospace, another AVIC subsidiary, jumped over 6%. Zhuzhou Hongda, which manufactures the PL-15 missiles reportedly used by Pakistani forces, also posted strong gains.

China’s role in Pakistan’s military build-up

AVIC Chengdu Aircraft is the manufacturer of the J-10C fighter jets, which were deployed by Pakistan during the conflict. “Chinese-made J-10C fighter jets were used in the engagement with Indian fighter jets,” Pakistan's Foreign Minister Ishaq Dar told Parliament during the clashes.

Zhuzhou Hongda produces the PL-15 air-to-air missiles, which were also reported to have been used by Pakistan’s military. These weapons underscore the deep military ties between Beijing and Islamabad, further supported by arms trade data.

According to the Stockholm International Peace Research Institute (SIPRI), China accounted for 81% of Pakistan’s arms imports between 2019 and 2023. The total value of Chinese arms exports to Pakistan during that period stood at $5.28 billion, representing 63% of Pakistan’s overall defence imports.

The sharp reversal in defence stock sentiment highlights how quickly the market had priced in a war premium—and how rapidly that bet has now unwound. The surge was underpinned by investor expectations that Chinese defence exports would rise in support of Pakistan, given the two countries’ close strategic ties through the $60 billion China-Pakistan Economic Corridor (CPEC)—a key Belt and Road Initiative project that includes Chinese-led security commitments.

Also read | China defence stocks jump up to 36% amid India-Pakistan tensions after Operation Sindoor

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