The AI bubble has burst in China; shares of major technology companies have recorded massive declines

Shares of Chinese technology companies are experiencing a period of severe declines, at a time when international stock markets are showing increasing vulnerability. The high valuations of companies in the artificial intelligence sector, concerns about the evolution of demand and the prospect of new restrictions on Chinese exports have triggered a sharp correction, wiping hundreds of billions of dollars off the sector's market capitalization, Reuters reports.

The STAR50 index, which brings together some of China's most important artificial intelligence and semiconductor companies, has lost approximately 40% in less than four months, equivalent to a decline in market value of around $480 billion, according to Reuters.

The development represents a warning signal for global financial markets, but also a blow to Beijing's strategy of encouraging the population to direct their savings toward stock market investments, thereby contributing to financing the development of the artificial intelligence industry.

According to the cited source, the correction has also interrupted a period of growth that lasted approximately two years and was fueled by the authorities' promises to stimulate the economy. This change in trend complicates Beijing's objective of ending the alternation between speculative expansions and stock market crashes, in favor of a market characterized by gradual and sustainable appreciation, known as a "slow bull market."

The main index of large-cap Chinese companies has fallen approximately 20% from the highs reached in June.

The STAR50 index recorded massive declines after its peak at the end of June (source: www.investing.com)

Beijing-based fund manager Dong Baozhen believes that the market has moved beyond a phase of economically justified growth and entered a period dominated by speculation, whose excesses are now being corrected through the bursting of the stock market bubble, according to Reuters.

The scale of the decline also reflects the fact that the previous rise in Chinese technology shares was much more pronounced than that recorded in Western markets or other Asian economies. By comparison, US shares in the artificial intelligence sector have undergone a relatively moderate correction, contributing to a decline of approximately 6% in the Nasdaq index from the record set three weeks ago.

According to the cited source, analysts and market participants have not identified a single event that triggered the massive sell-off in China. Among the factors that fueled investors' withdrawal are excessive valuations, tax obligations and the risk that the United States or other countries may ban the use of Chinese equipment in data centers.

The high concentration of investments in the technology sector has amplified the losses. According to Goldman Sachs estimates, companies associated with artificial intelligence account for approximately 42% of the Chinese market's capitalization and generate 57% of the value of transactions involving A-shares, listed in mainland China, and H-shares, traded in Hong Kong.

In a market dominated by individual investors, this exposure has meant that the effects of the correction have been felt by a large proportion of participants.

Among the companies that have recorded the most significant losses is robot manufacturer Unitree, whose shares have halved in value since trading began in August. At the time of its listing, demand from individual investors exceeded the available supply by approximately 8,000 times, reflecting exceptional enthusiasm for companies involved in developing advanced technologies.

Chip manufacturer CXMT has also lost more than a quarter of its market capitalization in the last month alone.

Two other semiconductor manufacturers, MetaX Integrated Circuits and Moore Threads Technology, have recorded declines of approximately 50% from their July levels. The development contrasts sharply with their spectacular stock market debuts last year, when shares in the two companies rose by 700% and 400%, respectively.

Numerous individual investors entered the market convinced that the support provided by the Chinese authorities to the technology sector represented a guarantee of favorable prospects.

According to the cited source, disappointment caused by the decline of a sector heavily promoted by Beijing has prompted some investors to redirect their capital toward assets considered safer. At the same time, deteriorating stock market sentiment risks making it more difficult for Chinese technology companies to raise financing through share offerings.

The pressures are particularly strong in the case of optical component manufacturers Zhongji Innolight and Eoptolink Technology, whose shares have lost approximately 60% from the highs recorded in June and July. The declines are partly explained by the prospect of US measures that could prohibit the supply of these companies' products to data centers in the United States.

Despite the corrections already recorded, the valuations of some Chinese companies remain considerably higher than those of their international competitors.

The STAR50 index is trading at a multiple of approximately 100 times earnings reported over the past 12 months, compared with nearly 250 times at its peak. By comparison, the Nasdaq 100 index has a multiple of approximately 30, a difference that fuels fears that the decline in Chinese shares could continue.

Hong Hao, partner and chief investment officer at Lotus Asset Management in Hong Kong, believes that "the current turbulence will cause numerous companies that intended to list to postpone their plans," according to Reuters.

The collapse of the technology sector contrasts with the Chinese authorities' efforts to strengthen capital market stability and improve investor returns.

In recent years, Beijing has attempted to limit volatility by restricting speculative trading financed through borrowing and by introducing measures against high-frequency trading. At the same time, state-backed investors have sold shares during periods of sharp increases, attempting to moderate excessive gains.

According to information published on the institution's website, CSRC Chairman Wu Qing met with market representatives at the beginning of the month to discuss proposals for improving the functioning of the financial system.

However, part of the investment community believes that the accelerated expansion of technology companies has generated significant structural imbalances.

Leo Wang, partner at Qianchuang Capital in Beijing, warns that the excessive emphasis placed on the weight of technology companies in the main stock market indices has distorted investor behavior and capital allocation. In his opinion, this concentration has favored the emergence of speculative bubbles in certain industries, while other economic sectors have been deprived of financing.

There are, however, investors who believe that the current declines may create buying opportunities and that the adjustment of valuations does not undermine the structural reforms pursued by the Chinese authorities.

They argue that capital market transformations must be assessed over the long term, given that the measures adopted in recent years have contributed to improving returns, particularly income distributed to investors.

According to an HSBC analysis, although Asian funds have been net sellers of Chinese shares over the past three months, their exposure to China generally remains above the benchmark weighting used in portfolios.

Goldman Sachs included Zhongji Innolight and CXMT on an updated list of recommendations published at the beginning of the month, alongside several dozen other Chinese companies involved in the development of artificial intelligence.

For his part, William Bratton, a strategist at BNP Paribas Securities, believes that the Chinese market offers opportunities for investors who carefully select their investments.

Nevertheless, in mainland China, numerous fund managers prefer to turn toward other industries or wait for further declines in valuations before resuming purchases.

According to the cited source, Wang Zhuo, partner at Shanghai Zhuozhu Investment Management, anticipates that Chinese semiconductor manufacturers and suppliers of artificial intelligence technologies will eventually, like other industrial companies in China, compete increasingly aggressively by cutting prices. In his opinion, the artificial intelligence sector will not be able to avoid this development either, and the current correction confirms the unsustainable nature of excessive speculative increases.

• The declines come after two years of enthusiasm and steady growth

Shares of Chinese technology companies have experienced, over the past two years, a period marked by spectacular recoveries, fueled by the economic stimulus measures adopted by Beijing, growing interest in artificial intelligence and China's ambitions to reduce its dependence on Western technologies.

The increases came after several difficult years for the sector, affected by regulatory interventions, trade tensions with the United States and US restrictions on exports of advanced semiconductors.

An important moment occurred in September 2024, when the Chinese authorities announced a package of monetary and financial measures aimed at supporting the economy and capital markets. The reduction in financing costs and the introduction of support mechanisms for stock market investments contributed to renewed investor interest in Chinese shares, including technology and IT companies, according to Reuters.

A new boost emerged at the beginning of 2025, with the launch of the artificial intelligence model developed by Chinese company DeepSeek. Its performance and reported development costs, considerably lower than those associated with some American models, fueled expectations regarding China's ability to compete with the United States in the AI sector.

According to Reuters, in February 2025, the Hang Seng Tech index recorded six consecutive weeks of gains, the longest such streak since 2020, while the recovery in Chinese shares added more than $1.3 trillion to the market capitalization of mainland China and Hong Kong markets in a single month.

The gains were supported by companies such as Alibaba, Tencent, Xiaomi and Lenovo, with investors anticipating that the development of artificial intelligence would generate additional revenue from cloud services, software, digital infrastructure and electronic equipment.

Reuters reported in February 2025 that Alibaba shares advanced 12.7% in a single trading session, following the publication of better-than-expected financial results and the announcement of additional investments in artificial intelligence. During the same period, Lenovo gained more than 12%, while Xiaomi reached new stock market highs.

The enthusiasm subsequently spread to manufacturers of semiconductors, optical components and data center equipment, against the backdrop of Beijing's policies to develop an independent technology industry. However, starting in July of this year, the upward trend came to a halt.