China's Tech Rally Falters as Investors Question Whether AI Spending Can Pay Off

The STAR 50 Index, which tracks 50 of the largest and most liquid companies on Shanghai's technology-focused STAR Market, has dropped more than 40% from its July peak. The market is home to semiconductor, artificial intelligence and other high-tech firms, and its slide has turned a celebrated rally into a hard question: can AI deliver profits large enough to justify the prices investors paid?

Even companies seen as proven winners are not immune. Battery maker CATL, long counted among China's technology success stories, has fallen 37% since the start of the year.

The rally took off after DeepSeek emerged in early 2025, stoking hope that Chinese companies could challenge their American counterparts in artificial intelligence. That optimism has faded as investors ask how quickly heavy AI spending can become earnings. Benjamin Cavender of China Market Research Group said the sell-off began as a valuation correction and some profit-taking, but has since become a more critical look at whether earnings can justify the excitement. Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, said investors want to see how the big tech groups convert AI spending into earnings. He noted that several AI initial public offerings drew strong early demand before enthusiasm cooled.

The trouble reaches beyond technology. China's long property downturn has damaged household confidence, and weak consumption continues to weigh on the advertising and e-commerce businesses of the major internet platforms. Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investment could add pressure to near-term earnings, with long-term monetization still uncertain. He also offered a counterweight: Chinese tech valuations have reached multi-year lows, which should limit the downside, though catalysts for a rise remain elusive.

CATL shows the profit problem in numbers. In the third quarter its revenue grew roughly 59%, while net profit rose only about 15%. Competition, a changing product mix, and changes to taxes and rebates are squeezing margins even as the company holds a dominant global position. Cavender put it plainly: CATL's problem is the gap between growth and profitability. Ling said lower unit profitability could weigh on near-term earnings too. The pattern points to a wider challenge for Chinese technology manufacturers, since fast expansion is not automatically producing stronger margins.

Not every corner of the market faces the same pressure. Brendan Ahern, chief investment officer at KraneShares, said STAR Board companies are benefiting from semiconductor spending by Chinese and American tech giants. Hong Kong-listed stocks are more exposed to sluggish domestic consumption because they carry heavier weightings in consumer-facing internet platforms.

Hui said the property downturn remains a fundamental obstacle, with households increasingly parking savings in cash rather than equities. Still, he saw limited downside for broader Chinese benchmarks, citing relatively undemanding valuations and light positioning among international investors.

Some strategists see opportunity. Jason Hsu, chairman and chief investment officer at Rayliant Global Advisors, said the Chinese tech sell-off has deepened alongside weakness in U.S. equities, as investors grow more skeptical about returns on AI spending. A recovery in American tech stocks could therefore support Chinese shares.

Cheaper prices alone may not be enough, Cavender cautioned. A sustained rebound, he said, would require stabilizing earnings, clearer returns on AI spending and stronger domestic demand. The question for the sector has shifted from how fast companies can grow to whether that growth can become lasting profit.