China’s technology stock rally has suffered a sharp reversal, with the mainland’s STAR50 index, dominated by artificial intelligence and semiconductor companies, falling 40% in less than four months and erasing about $480 billion in market value. The collapse has raised concerns about further losses, weakened investor confidence and threatened efforts to channel household savings into equities to finance the country’s AI expansion.
The decline has also interrupted a two-year market rally that began after promises of economic stimulus lifted share prices. Beijing has sought to establish a more stable “slow bull” market, moving away from repeated boom-and-bust cycles, but China’s blue-chip CSI300 index has fallen about 20% from its June peak.
“The stock market later evolved into a speculative crazy bull,” said Dong Baozhen, a Beijing-based fund manager. “And now we see the bubble bursting.”
The reversal has been more severe than the recent retreat in US technology shares. The Nasdaq has fallen 6% from a record high reached three weeks ago, while Chinese AI stocks have experienced a much deeper correction after reaching valuations that exceeded those of technology markets in the United States and elsewhere in Asia.
There has been no single obvious trigger for the Chinese sell-off. Traders have pointed to elevated share prices, tax bills and the threat of the United States and other countries restricting Chinese equipment in data centres. Concerns about demand for AI-related products have added to pressure on a market heavily exposed to the technology sector.
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 left investors across the market exposed to the downturn, particularly in a trading environment dominated by small investors.
Shares in robotics manufacturer Unitree, which attracted retail subscriptions 8,000 times the number of shares available at its listing, have halved since beginning trading in August. Chipmaker CXMT has lost more than a quarter of its value in the past month. Semiconductor companies MetaX Integrated Circuits and Moore Threads Technology, whose shares surged 700% and 400% respectively on their market debuts last year, have also lost half their value since July.
Chen Wensheng, a small-business owner and investor in the southern province of Hainan, said he had joined the rally because he believed the government supported companies such as Unitree, which had state-backed funds among its investors. He and his friends are now facing losses.
The downturn has also hit optical-component manufacturers Zhongji Innolight and Eoptolink Technology, whose shares have fallen about 60% from their June and July highs. The declines have partly reflected moves by Washington towards banning the companies from supplying US data centres.
Despite the sell-off, the STAR50 index trades at about 100 times trailing earnings, down from a peak of nearly 250 times. That remains substantially above the Nasdaq 100’s valuation of about 30 times earnings, fuelling concerns that Chinese technology shares could fall further.
“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 correction comes as Chinese regulators seek to reduce market volatility by restricting leverage and high-frequency trading. State-backed investors have also sold shares during rallies to limit gains. China’s securities regulator did not immediately respond to questions from Reuters, although its chairman, Wu Qing, met market participants earlier this month to discuss improvements to capital markets.
Some investors argue that the rally distorted capital allocation by directing excessive investment towards technology companies at the expense of other sectors. “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.”
Although some international investors continue to favour Chinese equities, many mainland investors are waiting for lower valuations before returning to the market. Wang Zhuo, a partner at Shanghai Zhuozhu Investment Management, said AI suppliers and chipmakers would eventually face the same competitive pressures as other Chinese manufacturers.
“Just like all other Chinese manufacturers, (chipmakers and AI suppliers) will eventually end up in a price war,” he said. “There’s no exception. All bubbles inevitably burst.”
