China defense stocks surge as India-Pakistan tensions escalate

Tensions between India and Pakistan are rising, with Chinese defense stocks surging after Pakistan's apparent use of China-made weapons to down Indian jets.

Pakistan's Foreign Minister Ishaq Dar claimed on Wednesday that Pakistan deployed Chinese-made J-10C fighter jets in a clash with India's air force, according to local state media.

AVIC, through its subsidiary AVIC Chengdu Aircraft, manufactures the J-10C fighter jets reportedly used by Pakistan in the recent conflict. Another subsidiary, AVIC Aerospace, which produces military aircraft and helicopters, saw its Hong Kong-listed shares rising over 6%.

And Shenzhen-listed stocks of AVIC Chengdu Aircraft surged as much as over 16%. It last traded 8.31% higher at 11.40 a.m. local time. On Wednesday, its stocks rose 17.05%, marking the most significant gain since last October.

Shares of China State Shipbuilding Corporation, which builds military and civilian vessels, inched up 0.4%.

"Pakistan is the largest buyer of Chinese arms, including fighter jets, air defense systems, naval vessels, and UAVs," said Yang Zi, associate research fellow at the S. Rajaratnam School of International Studies.

More than 60% of Chinese arms exports went to Pakistan between 2020 and 2024, according to data from the Stockholm International Peace Research Institute.

"It's certainly likely that Pakistan used Chinese aircraft," said Seth Jones, president of the defense and security department at the Center for Strategic and International Studies (CSIS).

Yang told CNBC that "the conflict serves as a positive testament to the quality of Chinese-made arms, given the performance of Pakistan's fighter jets and air defense systems against India's French- and Soviet-made aircraft."

He added that although it's unclear whether those involved air-to-air combat or ground-based surface-to-air missile strikes, it still indicates that Pakistan has "some successful capabilities, with Chinese support."

According to Pakistan's Information Minister Attaullah Tarar, five Indian Air Force jets were shot down while approaching Pakistani territory.

India, however, denied the reports of its jets being downed, dismissing them as "dis-information."

India announced early Wednesday that its armed forces had carried out strikes in Pakistan and the region it refers to as Pakistan-occupied Jammu and Kashmir. India's Ministry of Defense stated that the strikes targeted nine locations believed to be where "terrorist attacks" are planned and directed against India. 

That follows last month's militant attack in Pahalgam, Jammu and Kashmir, which left 26 people dead.

"The rise in China defence stocks probably [reflects] the view that if the India-Pakistan war escalates, China will arm Pakistan and replace any losses," said David Roche, strategist at Quantum Strategy.

Pakistan and China established diplomatic relations in 1951. China has also been Pakistan's most important defense partner since the end of the Cold War, according to the U.S. Institute of Peace.

"China and Pakistan have long standing political ties. They've had long standing economic ties, and in particular, over the last several years, they've had deepening military ties," said CSIS' Jones.

Jones noted, however, that the stock rally could just be a "temporary blip."