SHANGHAI (REUTERS) - As the United States-China "tech war" widens, investors are betting on China's efforts to replace US technologies with indigenous applications to run networks in the state sector.

In recent months, local governments and state firms such as China Telecom have announced plans and procurements aimed at fostering a home-grown tech ecosystem to displace gear from the likes of Intel, Microsoft, Oracle and IBM.

An index tracking Chinese IT stocks has jumped nearly 30 per cent this year, doubling blue-chip gains.

"We're seeing more US actions against China, and the future tends to be 'one world, two systems'," said Mr Wu Kan, portfolio manager at Soochow Securities Co, who has invested in local tech leaders including China National Software & Service Co, China Greatwall Technology Group and Beijing Kingsoft Office Software.

"Any segment that faces decoupling risks represents big investment opportunities."

Some market watchers warn valuations of China tech stocks are getting frothy at roughly 60 times trailing earnings, noting Chinese firms could take years to catch up to established global players.

But Mr Wu said price levels are justified by growth potential and direct government backing.

The Trump administration has recently strengthened restrictions on China's Huawei Technologies and sanctioned China-owned apps TikTok and WeChat.

Washington also rolled out a "Clean Network" initiative to exclude Chinese tech firms perceived as threatening national security.

Under US pressure, Chinese vendors are poised to gain local market share, said Mr Jie Lu, Robeco's China research head.

"China will ramp up the investment and R&D intensity for critical industries such as semiconductors," Mr Lu said.

Dongxing Securities predicted that a retooling would create a one trillion yuan (S$198 billion) opportunity over the next three years for local vendors.

KUNPENG PUSH

Local governments are rushing to form industry federations to promote the use of Huawei's Kunpeng processing technologies.

Last week, China Unicom's Wuchang subsidiary struck a partnership with Huanghe Technology, which makes servers and PCs using Kunpeng technologies.

In May, IT distributor Digital China said it was building plants to make PCs and servers using Kunpeng CPUs.

Also in May, China Telecom said it would procure up to 56,314 servers in 2020, one-fifth of them using Kunpeng and Hygon Dhyana chips, which rival US brands Intel and AMD in a move seen as a gesture of Beijing's localisation push.

"China must promote domestic replacement to avoid being strangled, even as its current technology lags by far," Mr Zhang Chi, chairman of Xin Ding Capital said during an investor roadshow for Haigon Information Technology, the maker of Hygon Dhyana chips.

Some 95 per cent of Chinese servers use CPUs from Intel.

It would be disaster, Mr Zhang said, "if one day, Trump bans Intel from selling CPUs to China".

Mr Zhang expects Chinese government agencies to replace all computers using US chips in the next five years, echoing views of many analysts.

National Software & Service, which makes operating systems that compete with Windows and middleware that aims to rival IBM and Oracle, expects revenue this year to jump 70 per cent to 10 billion yuan.

Beijing Kingsoft Office Software this week posted a 143 per cent jump in first-half profit and said China's need for information security is boosting sales.

Beijing Baolande Software Corp also sees governments and finance clients as new growth engines thanks to replacement demand, investor relations official Guo Xing said.

But Mr Brian Bandsma, a New York-based portfolio manager at Vontobel Asset Management, said the opportunities in replacement demand would be limited, given less competitive local offerings and what may be longer-than-expected adoption rates.

"Companies like Microsoft have been around for decades and have a very complex piece of software that's being heavily used by multiple industries. There's a reason why Microsoft is in the position it's in," said Mr Bandsma.

"There's probably too much optimism baked into valuations in terms of what these local companies are going to get out of China's focus on domestic suppliers."