In China, the AI Bubble Has Already Burst as STAR50 Shed 40% and $480 Billion

Unitree, the robot-maker whose shares were 8,000 times oversubscribed by retail buyers when they listed, has since lost half its value. It began trading in August. That single figure carries much of what has happened to China's AI trade over the past four months.

The mainland STAR50 index, which tracks the country's AI and semiconductor leaders, has fallen 40% in less than four months. About $480 billion in market value has disappeared. The slide has halted a rally that ran for two years, since promises of economic stimulus sent Chinese shares climbing. China's broad blue-chip index is down about 20% from the highs it reached in June.

The damage is concentrated because of how much of the market AI has come to occupy. Goldman Sachs figures put AI stocks at 42% of China's market capitalisation, and 57% of turnover across mainland A-shares and Hong Kong's H-shares. In a market dominated by small investors, few have been spared. Beijing-based fund manager Dong Baozhen said the market had turned into a speculative "crazy bull," and that the bubble is now bursting.

The pain has spread across the retail favourites. Chipmaker CXMT has shed 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 both halved since July. Optical parts makers Zhongji Innolight and Eoptolink Technology are down roughly 60% from their June and July highs, partly because Washington is moving toward banning them from supplying US data centres.

There was no obvious trigger for the selling. Traders pointed to a mix of high prices, tax bills, and the threat that the US or other countries might bar Chinese equipment from data centres. The reversal is sharper than in the West: US AI stocks have led a 6% drawdown in the Nasdaq from a record set three weeks ago, which the report likens to a mere prick by comparison.

For individual investors, the loss has a personal shape. Chen Wensheng, a small business owner from Hainan in southern China, said he bought in feeling encouraged by what he saw as official backing for companies like Unitree, which counted state-backed funds among its investors. He and his friends are now nursing losses. That frustration, with a theme Beijing had favoured ending so badly, has pushed many investors toward defensive assets and 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 leave room for further falls. The STAR50 still trades at around 100 times trailing earnings, down from a peak near 250, against a multiple of 30 for the Nasdaq 100. Investors worry the selloff could get worse before it improves.

The episode cuts against official aims. Authorities have tried to raise returns and dampen volatility by cracking down on leverage and high-frequency trading, with state-backed investors selling into rallies to hold gains in check. The goal was a "slow bull" market that avoids China's old boom-bust pattern. The China Securities Regulatory Commission did not immediately answer questions sent by Reuters last week. Its chairman, Wu Qing, met market participants earlier this month to hear suggestions on improving capital markets, according to the regulator's website. Leo Wang of Beijing's Qianchuang Capital argued that overemphasising tech weighting in major indexes 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 neither surprising nor harmful to long-term market reforms that have lifted returns, particularly income, in recent years. HSBC research shows Asia funds remain overweight on China despite three months of selling. Goldman Sachs put Innolight and CXMT on a revamped recommendation list earlier this month, and BNP Paribas Securities strategist William Bratton has said the market offers opportunities for the careful. On the mainland, though, many are eyeing other sectors or waiting for lower valuations. Shanghai fund manager Wang Zhuo expects chipmakers and AI suppliers to end up in a price war like other Chinese manufacturers. "All bubbles inevitably burst," he said.