HONG KONG (Reuters) - Some Asian hedge funds are betting on leading Chinese tech companies such as Xiaomi ( XIACF ) and Baidu ( BIDU ), buoyed by their artificial intelligence innovations, despite the threat of further U.S. curbs that could take effect next year.

A U.S. ban imposed on advanced chip exports to China has kept many global investors on the sidelines. But those scouring China for potential winners said firms there are developing AI products for a massive home market as their self-developed large language models catch up, and valuations are lower than their U.S. peers.

Fund managers say they are particularly upbeat about growing AI adoption in the lives of China's 1.4 billion people, from mobile phones and smart wearables to social apps and games.

"Chinese innovations are reaching end-users rapidly," said Nilesh Jasani, founder of GenInnov Funds and former vice chairman for Asia at Jefferies.

"We have been extremely excited by China's ascendancy in mobility and mobiles, benefiting names like Xiaomi ( XIACF ) and Baidu ( BIDU )," he said, noting his fund has been raising exposure to China.

China's leading search engine company Baidu ( BIDU ) recently launched a text-to-image generation tool for its ad clients. It also plans to release AI glasses early next year and debut its robotaxi service outside mainland China.

Hong Kong hedge fund Monolith Management, which manages assets worth $300 million, has set its sights on smartphone maker Xiaomi ( XIACF ) and its suppliers.

"Xiaomi ( XIACF ) offers compelling edge AI user experience through its self-developed HyperOS, with a larger ecosystem of IoTs and cars to tap into, compared to its Western counterparts," said Timothy Wang, chief investment officer at Monolith.

Chinese tech stocks have lagged behind their U.S. counterparts in this year's global AI frenzy.

The Hang Seng Tech Index and CSI AI sector have risen 19% and 21%, respectively, while the Nasdaq 100 has gained over 30%.

But Wang predicts growth opportunities for China's homegrown AI-powered products and services in the coming year. The advances would be driven by the proliferation and commercialisation of large language models, coupled with the country's supply chain strengths and a wealth of skilled product managers, he said.

ByteDance's AI chatbot Doubao became the world's second most popular AI application in November with 60 million monthly active users, only behind ChatGPT, according to Aicpb.com.

"We are seeing breakthroughs in AI software, such as text-to-video generation and multimodal AI," said Sean Ho, CIO of Triata Capital, which manages $770 million in assets.

"The high rankings of Chinese AI models on open-source platforms like Hugging Face reflect their ambition to lead globally, a trend that is unlikely to be derailed by ongoing tech conflicts," he said in recent investor communications.

Not everyone is convinced, especially as U.S., Taiwan, and Japan semiconductor stocks dominate tech investors' portfolios and deliver strong results.

Eventually, it comes down to whether AI can boost earnings growth, said Andy Maynard, head of equities at China Renaissance Securities.

"China is clearly lagging the U.S. in terms of monetisation at the listed company level," he said.