China AI stocks slide as valuation reset deepens market risks

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China AI stocks slide

Highlights

China's STAR50 index, dominated by AI and semiconductor stocks, has plunged 40% in under four months, erasing nearly $480 billion in market value amid demand concerns and export risks.
Heavily traded AI equities, representing 42% of China's market capitalisation, face sell-offs due to elevated valuations, tax liabilities, and potential U.S. technology export bans.
The STAR50, despite dropping to around 100 times trailing earnings from 250, remains expensive relative to the Nasdaq 100 and is deterring further tech equity fundraising.

Sharp repricing hits AI leaders

As reported by Reuters, the mainland STAR50 index of AI and semiconductor heavyweights has fallen 40% in less than four months, wiping out about $480 billion in market value as concerns grow over AI demand and possible curbs on Chinese equipment exports.

The reversal halts a rally that has run for two years after stimulus promises helped lift shares, and it leaves China's broad blue-chip index down about 20% from highs reached in June. Beijing-based fund manager Dong Baozhen said the market had turned into a speculative bull run and is now seeing the bubble burst.

Investors and traders say there is no single trigger for the selling, but elevated valuations, tax bills, and the threat that the U.S. or other countries could ban Chinese equipment in data centres are all weighing on sentiment. According to Goldman Sachs, AI stocks account for 42% of China's market capitalisation and 57% of turnover across mainland A-shares and Hong Kong H-shares, leaving much of the market exposed to the downturn.

Recent high-profile listings and chip names have been hit hard. Robot maker Unitree, whose listing was 8,000 times oversubscribed by retail buyers, has halved since trading began in August, while chipmaker CXMT has lost more than a quarter of its value in the past month. MetaX Integrated Circuits and Moore Threads Technology, which surged on their debuts last year, have also halved since July.

Funding outlook and reform goals face pressure

Falling share prices are pushing investors toward defensive assets and are likely to slow equity fundraising by technology companies, according to market participants. Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong, said the downturn is likely to stop many companies seeking listings.

Optical parts makers Zhongji Innolight and Eoptolink Technology are down roughly 60% from highs in June and July, partly as Washington moves toward banning them from supplying U.S. data centres. Even after the selloff, the STAR50 still trades at around 100 times trailing earnings, down from nearly 250, a level that keeps investors wary when compared with the Nasdaq 100 multiple of about 30.

The boom and bust also contrast with authorities' efforts to improve returns and reduce volatility by cracking down on leverage and high-frequency trading. State-backed investors have been selling into rallies to cap gains, while China Securities Regulatory Commission Chairman Wu Qing has met market participants this month to gather views on improving capital markets, according to the regulator's website.

Some investors argue the correction does not derail longer-term market reform and may create selective opportunities. HSBC research says Asia funds overall remain overweight China despite selling over the past three months, while Goldman Sachs has added Innolight and CXMT to a revised recommendation list and BNP Paribas Securities strategist William Bratton says the market offers opportunities for careful buyers. Still, some mainland investors expect valuations to fall further and warn that Chinese chipmakers and AI suppliers could eventually face the same price wars seen across other manufacturing sectors.

In our earlier article on the AI-linked tech stock selloff in the U.S., we described how hotter-than-expected inflation data revived rate-hike fears and pushed Nasdaq futures lower as investors reassessed the cost of financing large-scale AI spending. We also noted that weakness in heavily watched names and cautious signals from chipmakers reinforced concerns that higher interest rates could curb AI investment and prolong the risk-off move across the sector.

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