While global tech stocks teeter, China’s AI and semiconductor shares have already crashed, Reuters reported on October 26. The mainland STAR50 index has fallen 40% in less than four months, vaporising some $480 billion in market value, as lofty valuations collapsed under worries about AI demand and curbs on Chinese exports. Beijing-based fund manager Dong Baozhen told Reuters the market “later evolved into a speculative crazy bull” and “now we see the bubble bursting”. The selloff has also stalled Beijing’s push for a steady “slow bull” market, and with the index still trading at around 100 times trailing earnings, investors worry the fall could go further.
The Scale Of The Fall
The STAR50 index tracks China’s AI and semiconductor leaders, and its 40% drop in under four months stands in sharp contrast to the milder pullback in the United States. According to Reuters, US AI stocks have led only a 6% drawdown in the Nasdaq from a record high scaled three weeks ago, which Reuters describes as a mere prick beside China’s crash. China’s broad blue-chip CSI300 index has also dropped about 20% from highs made in June.
There was no single obvious selling trigger, Reuters reports. Traders cited high prices, tax bills, and the threat of the United States or other nations banning Chinese equipment in data centres. The scale of the exposure is large: according to Goldman Sachs, AI stocks account for 42% of China’s market capitalisation and 57% of turnover across mainland-listed A-shares and Hong Kong’s H-shares, in a market dominated by small investors.
The Stocks Hit Hardest
Robot maker Unitree, whose shares were 8,000 times oversubscribed by retail buyers at listing, has halved since trading began in August. Chipmaker CXMT has lost more than a quarter of its value in the past month. Chipmakers MetaX Integrated Circuits and Moore Threads Technology, which leapt 700% and 400% respectively on their market debuts last year, have also halved in value since July.
Optical parts makers Zhongji Innolight and Eoptolink Technology are down roughly 60% from highs in June and July, in part as Washington moves towards banning them from supplying US data centres. Even after the fall, the STAR50 index still trades at around 100 times trailing earnings, down from a high of nearly 250, against a multiple of 30 for the Nasdaq 100. Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong, told Reuters the selloff is “going to put a stop for many of the companies trying to get themselves listed”.
Why It Matters
The crash matters beyond China because it tests the funding story behind the AI boom. Frustration that an investment theme backed by Beijing has ended badly has driven many investors into defensive assets, Reuters reports, and it is likely to slow equity fundraising by tech firms. China’s market regulator, the China Securities Regulatory Commission, did not immediately reply to questions faxed by Reuters last week, while its chairman Wu Qing met market participants earlier in October to hear suggestions on improving capital markets.
The contrast with the rest of the chip world is stark. Bank of Korea’s warning that an AI slowdown could cut chip exports by up to $100 billion shows the same demand question from the supply side, while SpaceX’s $40 billion Apollo chip lease shows US AI hardware financing still expanding. Leo Wang, partner at Beijing-based Qianchuang Capital, told Reuters that overemphasising the “technology content” of major indexes “leads to a deviation, even a distortion, in capital behaviour”, creating “a severe bubble in certain sectors and a serious drain on others”. Some investors still see value: Goldman Sachs has Innolight and CXMT on a revamped recommendation list, and BNP Paribas Securities strategist William Bratton has said the market offers buying opportunities for the careful.
Background
The rally ran for two years, after economic stimulus promises sent shares soaring, and Beijing had hoped to break a long boom-bust pattern by steering the market towards a “slow bull” that delivers reliable performance. That push has now stalled, and the crash also intersects with the export-control fight, as in China’s proposed export controls on AI technologies. Fund manager Wang Zhuo, partner at Shanghai Zhuozhu Investment Management, summed up the mood for Reuters: “Just like all other Chinese manufacturers, (chipmakers and AI suppliers) will eventually end up in a price war. There’s no exception. All bubbles inevitably burst.”
Source: Reuters: China AI bubble burst
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