Chinese defense stocks plunge up to 9% as India-Pakistan ceasefire hits "pause" on war bets

Chinese defense stocks experienced a sharp decline of up to 9% following the unexpected India-Pakistan ceasefire announced on May 10. Key companies such as AVIC Chengdu Aircraft and Zhuzhou Hongda saw significant drops, reversing the gains made during the brief period of heightened conflict. These stocks had initially surged on expectations that the escalating tensions between India and Pakistan would lead to increased Chinese arms exports to Pakistan, a crucial market for Chinese military equipment.

Between 2019 and 2023, China accounted for a staggering 81% of Pakistan’s total arms imports, solidifying its position as a key supplier. However, with the surprise ceasefire bringing relief to the region, the "war premium" built into the prices of Chinese defense stocks began to evaporate. Investors who had previously bet on the likelihood of a prolonged conflict—and by extension, higher military sales—found themselves facing a sharp reversal.

In contrast, India's defense stocks showed a more resilient performance. Despite the ceasefire, companies like Hindustan Aeronautics Limited (HAL) and Bharat Dynamics Limited (BDL) maintained a stable trajectory, benefiting from long-term defense modernization projects and increasing domestic demand for military hardware. India’s defense sector, supported by its indigenous defense manufacturing capabilities and expanding military needs, offers a more diversified growth outlook compared to its Chinese counterparts, which are highly dependent on regional geopolitical tensions.

India's emphasis on self-reliance in defense production, especially through initiatives like "Atmanirbhar Bharat," further shields its defense companies from the volatility tied to international conflicts. While the ceasefire in South Asia may have dimmed short-term prospects for Chinese defense stocks, India's defense sector seems better poised to weather such geopolitical shifts with long-term strategic plans in place.