China's AI Stock Bubble Bursts, STAR50 Index Falls 40%

China's technology stocks have crashed amid concerns about AI demand and restrictions on China's exports. The mainland STAR50 index of AI and semiconductor leaders has fallen 40% in less than four months, eliminating about $480 billion in market value. The collapse signals danger for fragile global markets and undermines China's efforts to channel household savings into stocks to finance the AI boom. The downturn has interrupted a two-year rally that began with promises of economic stimulus. The decline has also stalled Beijing's effort to replace repeated booms and busts with a gradually rising market that provides dependable returns. China's broad CSI300 blue-chip index has fallen about 20% from June highs.

Beijing-based fund manager Dong Baozhen said speculation had overtaken the rally and the bubble was now bursting. China's preceding rally had exceeded gains in Western markets and elsewhere in Asia. By comparison, US AI stocks have led a 6% decline in the Nasdaq from a record reached three weeks ago. No clear event triggered China's selling. However, traders cited expensive valuations, tax bills and possible bans by the United States or other countries on equipment from China in data centres. Goldman Sachs puts AI stocks at 42% of market capitalisation and 57% of turnover across mainland A-shares and Hong Kong H-shares. The concentration has left few participants unscathed in a market dominated by small investors.

Robot-maker Unitree's shares have halved since trading began in August, following a listing that retail investors oversubscribed 8,000 times. Chipmaker CXMT has lost more than a quarter of the company's value over the past month. Chipmakers MetaX Integrated Circuits and Moore Threads Technology have each lost half their value since July, after debut gains last year of 700% and 400%, respectively. Chen Wensheng, a small-business owner and investor from Hainan, said perceived official backing encouraged Chen to buy companies such as Unitree, whose investors included state-backed funds. Chen said Chen and friends were now facing losses. Disappointment with an investment theme supported by Beijing has pushed many investors towards defensive assets and will probably slow technology companies' equity fundraising.

Optical-parts makers Zhongji Innolight and Eoptolink Technology have fallen roughly 60% from highs reached in June and July, partly because Washington is moving towards excluding the companies from US data centres. The STAR50 still trades at around 100 times trailing earnings, down from nearly 250, compared with a multiple of 30 for the Nasdaq 100. Investors worry that prices could fall further before recovering. Hong Hao, managing partner and chief investment officer at Hong Kong's Lotus Asset Management, said the downturn would stop many companies from pursuing listings.

Authorities have sought to raise returns and reduce volatility through restrictions on leverage and high-frequency trading. State-backed investors sold during rallies to restrain gains. The China Securities Regulatory Commission did not immediately answer questions faxed last week. The regulator's website said Chairman Wu Qing met market participants earlier this month to seek recommendations for improving capital markets. Leo Wang, a partner at Beijing-based Qianchuang Capital, argued that excessive emphasis on technology companies' index weights distorted investment behaviour, inflating some sectors while draining others.

However, some investors regard the decline as an opportunity rather than a surprise or a setback for long-term market reforms. Those investors say the reforms have helped improve returns, particularly income, in recent years. HSBC research shows that Asia funds remain overweight China despite selling over the past three months. Goldman Sachs included Innolight and CXMT among dozens of China's AI stocks on an updated recommendation list published earlier this month. BNP Paribas Securities strategist William Bratton has said selective investors can find buying opportunities. Many mainland investors nevertheless favour other sectors or want lower valuations before buying. Wang Zhuo, a fund manager and partner at Shanghai Zhuozhu Investment Management, said chipmakers and AI suppliers would ultimately face price wars like other manufacturers in China, with no exceptions, and that every bubble eventually bursts.