China's AI Stock Bubble Bursts: Star50 Down 40% as $480 Billion Vanishes

Shares in Unitree, the robot maker, were 8,000 times oversubscribed by retail buyers when they listed in August. Since they started trading, they have lost half their value. The same story, with different numbers, runs across China's technology market, where the mainland Star50 index of AI and semiconductor leaders has fallen 40 percent in less than four months, erasing about $480 billion in market value.

The slide has come while stocks elsewhere are only wobbling. US AI shares have led a 6 percent drawdown in the Nasdaq from a record high reached three weeks ago, which the source describes as a mere prick by comparison. China's broad blue-chip index has dropped about 20 percent from its June highs. The reversal ends a rally that had run for two years, since promises of economic stimulus sent shares soaring, and it climbed higher than rallies in the West or elsewhere in Asia.

There was no obvious trigger. Traders pointed to a mix of high prices, tax bills, and the threat that the US or other countries might ban Chinese equipment from their data centers. Worries about AI demand and curbs on Chinese exports also weighed. Beijing-based fund manager Dong Baozhen put it bluntly: the market had evolved into a speculative crazy bull, and now the bubble was bursting.

Because AI stocks make up 42 percent of China's market capitalization and 57 percent of turnover across mainland A-shares and Hong Kong H-shares, according to Goldman Sachs, few investors have escaped, in a market dominated by small holders. 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 percent and 400 percent on their debuts last year, have both halved since July. Optical parts makers Zhongji Innolight and Eoptolink Technology are down roughly 60 percent from their June and July highs, partly because Washington is moving toward barring them from supplying US data centers.

One of the people hurt is Chen Wensheng, a small business owner and investor from Hainan. He bought in, he said, emboldened by what he saw as official support for names like Unitree, which counted state-backed funds among its investors. He and his friends are now nursing losses. That frustration, with a theme backed by Beijing ending so badly, has pushed many investors into defensive assets and is likely to slow equity fundraising by tech companies. Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong, said the turmoil will stop many companies trying to get listed.

Valuations remain stretched. The Star50 trades at around 100 times trailing earnings, down from a peak near 250, against a multiple of 30 for the Nasdaq 100, and investors worry the sell-off could get worse before it improves.

The episode cuts against what authorities were trying to do. They had cracked down on leverage and high-frequency trading to improve returns and dampen volatility, and state-backed investors sold into rallies to keep gains in check. The aim was a reliable, so-called slow bull market rather than the old boom and bust, and that push has now stalled. China Securities Regulatory Commission Chairman Wu Qing met market participants earlier this month to hear suggestions on improving capital markets. Some investors say the boom damaged market structure. Leo Wang, a partner at Beijing-based Qianchuang Capital, said overemphasizing technology content distorted capital behavior, creating a severe bubble in certain sectors and a serious drain on others.

What to watch now is whether the Star50's multiple keeps falling toward the Nasdaq's, how many planned listings are delayed, and whether Washington finalizes its ban on Chinese optical suppliers.