China’s AI and chip stock index falls 40%, erasing about $480 billion

Beijing wanted a steady stock-market rise that would draw savers into funding its technology ambitions. Instead, China’s STAR50 index of AI and semiconductor leaders has fallen 40% in less than four months, erasing about $480 billion in market value, Reuters reported on October 26. The reversal now threatens fundraising by technology companies.

The losses have interrupted a two-year rally that began with promises of economic stimulus. They also challenge officials’ push for a “slow bull” market: sustained gains rather than another boom followed by a bust. China’s broader blue-chip index has dropped about 20% from its June highs.

The favorites fall hardest

The market’s exposure to AI is substantial. Goldman Sachs estimated that AI stocks represented 42% of market capitalization and 57% of trading turnover across mainland A-shares and Hong Kong H-shares. Reuters described a market dominated by small investors, leaving the retreat’s effects widely felt.

Robot maker Unitree illustrates the swing in sentiment. Retail demand at its listing was 8,000 times the shares available to those buyers. Its stock has since halved from the start of trading in August. Other companies that attracted enthusiasm for Chinese chips have also suffered steep losses:

• CXMT lost more than a quarter of its market value in the month before Reuters’ report.
• MetaX Integrated Circuits and Moore Threads Technology each lost about half their value since July. Their shares had jumped 700% and 400%, respectively, on their market debuts last year.

For some investors, perceived official backing helped justify buying. Chen Wensheng, a small-business owner in Hainan, told Reuters he entered the rally encouraged by what he saw as government support for companies such as Unitree, whose investors included state-backed funds. He and his friends are now nursing losses.

About 100×STAR50

The STAR50 still traded at about 100 times trailing earnings, down from a peak near 250.

30×Nasdaq 100

Reuters cited a Nasdaq 100 earnings multiple of 30.

No single trigger, several pressures

A lower share price has not removed valuation concerns. At roughly 100 times trailing earnings—the previous year’s profits—the STAR50 remains expensive relative to the Nasdaq 100 comparison in Reuters’ analysis. Investors told Reuters they worried the selloff could deepen.

There was no obvious single trigger for the selling. Traders cited high prices, tax bills and the threat that the United States or other countries might ban Chinese equipment from data centers. Reuters also identified worries about AI demand as a pressure on lofty valuations, rather than documenting a confirmed collapse in demand.

Optical-parts suppliers Zhongji Innolight and Eoptolink Technology have fallen roughly 60% from their June and July highs. Reuters linked part of those declines to Washington moving toward barring them from supplying US data centers. The restrictions remain a policy threat, not a completed ban in this account.

The next pressure point is listings

The consequences could extend beyond existing shareholders. Hong Hao, managing partner and chief investment officer at Lotus Asset Management, told Reuters the downturn would stop many companies trying to list. Reuters reported that frustrated investors were shifting toward defensive assets, potentially slowing equity fundraising by technology firms.

Not everyone sees the retreat as a reason to stay away. Goldman Sachs included Innolight and CXMT on a revamped recommendation list earlier in October. BNP Paribas Securities strategist William Bratton has also argued that careful investors can find opportunities. Others remain wary: Shanghai fund manager Wang Zhuo expects chipmakers and AI suppliers eventually to face price wars.