China AI Stocks: $480bn wiped out as technology shares plunge

China’s technology stocks have suffered a steep downturn, with the STAR 50 index of artificial intelligence and semiconductor companies falling 40% in less than four months and wiping out an estimated $480 billion in market value.

The sell-off has raised concerns about global technology markets and could weaken Beijing’s efforts to encourage household savings into equities to finance the country’s artificial intelligence ambitions.

The downturn has also interrupted a two-year rally that began after Chinese authorities announced economic stimulus measures. It has complicated Beijing’s efforts to build a more stable stock market, with the country’s broad blue-chip index falling about 20% from its June highs.

“The stock market later evolved into a speculative crazy bull,” said Beijing-based fund manager Dong Baozhen. “And now we see the bubble bursting.”

Chinese technology shares had climbed more sharply than their counterparts in Western markets and elsewhere in Asia. By comparison, the Nasdaq has fallen about 6% from its record high reached three weeks earlier, amid a broader retreat in US AI stocks.

There has been no single clear trigger for China’s sell-off. Traders have pointed to elevated valuations, tax bills and concerns that the United States or other countries could restrict Chinese equipment used in data centres.

According to Goldman Sachs, AI stocks accounted for 42% of China’s market capitalisation and 57% of trading turnover across mainland-listed A-shares and Hong Kong-listed H-shares. The concentration has exposed many investors, particularly individual traders, to the downturn.

Shares in robotics maker Unitree, whose listing attracted retail demand 8,000 times the available offering, have fallen by half since trading began in August. Semiconductor maker CXMT has lost more than a quarter of its value over the past month.

Chipmakers MetaX Integrated Circuits and Moore Threads Technology, which surged by 700% and 400% respectively on their market debuts last year, have also lost around half their value since July.

Chen Wensheng, a small business owner and investor in the southern Chinese province of Hainan, said he had bought shares during the rally because he believed the government supported companies such as Unitree. State-backed funds were among the company’s investors, he said. Chen and his friends are now facing losses.

The downturn has frustrated investors who believed technology companies backed by Beijing would continue to perform strongly. Some have moved towards defensive assets, while the sell-off could make it harder for technology firms to raise money through share listings.

Shares in optical component makers Zhongji Innolight and Eoptolink Technology have fallen about 60% from their June and July peaks. The declines have partly reflected moves by Washington towards restricting the companies’ ability to supply US data centres.

Despite the recent losses, the STAR 50 index is still trading at about 100 times its trailing earnings, down from a peak of nearly 250 times. Investors have compared that valuation with the Nasdaq 100’s multiple of around 30, raising concerns that Chinese shares could face further declines.

“What’s happening is now going to put a stop for many of the companies trying to get themselves listed,” said Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong.

The market turmoil has also highlighted tensions between the technology rally and Chinese regulators’ efforts to improve market stability. Authorities have sought to curb excessive leverage and high-frequency trading, while state-backed investors have sold shares during rallies to limit gains.

The China Securities Regulatory Commission did not immediately respond to questions sent by Reuters. Its chairman, Wu Qing, met market participants earlier this month to hear proposals for improving capital markets, according to the regulator’s website.

Some investors argue that an excessive focus on technology companies has distorted the allocation of capital across the wider market.

“Overemphasising the ‘technology content’ — that is, the weighting of tech companies by market value in major indexes — leads to a deviation, even a distortion, in capital behaviour,” said Leo Wang, a partner at Beijing-based Qianchuang Capital.

“This created a severe bubble in certain sectors and a serious drain on others.”

Others believe the sell-off could create opportunities for investors and does not necessarily undermine China’s longer-term market reforms. These reforms have increasingly focused on improving investor returns, particularly income.

Although Asian investment funds have been net sellers of Chinese equities over the past three months, they remain overweight on China overall, according to HSBC research.

Goldman Sachs has included Innolight and CXMT among dozens of Chinese AI stocks on a revised recommendation list published earlier this month. BNP Paribas Securities strategist William Bratton has also said the market offers opportunities for selective investors.

However, many mainland investors are looking beyond technology shares or waiting for valuations to fall further before buying again.

Wang Zhuo, a partner at Shanghai Zhuozhu Investment Management, said Chinese chipmakers and AI suppliers could eventually face intense price competition, similar to other manufacturing industries in the country.

“There’s no exception,” he said. “All bubbles inevitably burst.”