China's AI Stock Bubble Bursts as STAR50 Plunges 40% and $480 Billion Evaporates

Shares in Unitree, the robot maker whose listing in August was oversubscribed 8,000 times by retail buyers, have since lost half their value. It is one of the sharper examples of a pattern now running through China's market: while global tech stocks wobble, Chinese AI and chip stocks have already crashed.

The mainland STAR50 index, which tracks AI and semiconductor leaders, has fallen 40% in under four months. About $480 billion in market value has disappeared. The slide has ended a two-year rally that began when promises of economic stimulus sent shares higher, and China's broad blue-chip index is now roughly 20% below its June highs. For comparison, the Nasdaq has pulled back 6% from a record set three weeks ago, a drawdown led by US AI stocks. The Chinese rally climbed higher than those in the West or elsewhere in Asia, and the fall has been correspondingly steeper.

Traders point to no single trigger. They cite high prices, tax bills, and the threat that the United States or other countries could ban Chinese equipment from data centres. Washington is moving toward barring optical parts makers Zhongji Innolight and Eoptolink Technology from supplying US data centres, and both are down roughly 60% from their June and July highs.

The damage is spread widely because AI stocks account for 42% of China's market capitalisation and 57% of turnover across mainland A-shares and Hong Kong H-shares, according to Goldman Sachs, in a market dominated by small investors. Chipmaker CXMT has lost more than a quarter of its value in the past month. MetaX Integrated Circuits and Moore Threads Technology, which jumped 700% and 400% respectively on their debuts last year, have halved since July.

One of the people caught is Chen Wensheng, a small business owner and investor from Hainan in the south. He bought in, he said, encouraged by what he took to be official backing for companies like Unitree, which counted state-backed funds among its investors. He and his friends are now sitting on losses. Frustration that a theme endorsed by Beijing ended this way has pushed many investors into defensive assets, and it is likely to slow equity fundraising by tech firms. Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong, said the selloff will halt many companies trying to list.

Valuations remain a worry. The STAR50 trades at around 100 times trailing earnings, down from nearly 250 at its peak, against about 30 for the Nasdaq 100, and some investors fear the selloff could get worse before it improves. Beijing fund manager Dong Baozhen said the market had become a "speculative crazy bull" and that the bubble was now bursting.

The episode cuts against official aims. Authorities have been trying to build a "slow bull" market with steadier returns, cracking down on leverage and high-frequency trading, and state-backed investors sold into rallies to hold gains in check. The China Securities Regulatory Commission did not immediately answer faxed questions from Reuters last week. Its chairman, Wu Qing, met market participants earlier this month to hear suggestions on improving capital markets, the regulator said on its website. Leo Wang, a partner at Beijing's Qianchuang Capital, argued that giving heavy index weight to tech companies distorted capital behaviour, creating a severe bubble in some sectors and a serious drain on others.

Not everyone is bearish. Some see the selloff as unsurprising and not harmful to long-term reforms that have raised returns, particularly income, in recent years. HSBC research shows Asia funds have been sellers over the past three months but remain overweight China. Goldman Sachs put Innolight and CXMT among dozens of Chinese AI stocks on a revamped recommendation list earlier this month, and BNP Paribas Securities strategist William Bratton has called the market a buying opportunity for the careful. On the mainland, though, many are eyeing other sectors or waiting for lower valuations. Shanghai fund manager Wang Zhuo of Zhuozhu Investment Management expects chipmakers and AI suppliers to end up in a price war like other Chinese manufacturers. "All bubbles inevitably burst," he said. What to watch next is whether US restrictions on Chinese data-centre equipment widen and whether valuations fall further.