Why is the Chinese stock market missing the AI rally

China’s stock market has failed to capitalize on the worldwide artificial intelligence surge in 2026, according to Yardeni Research. The CSI 300 index, a key indicator of China’s stock market, has plummeted nearly 6% this year, in stark contrast to the impressive performance of South Korea’s Kospi and Taiwan’s Weighted Index, which have surged above 65%.

This discrepancy surfaced following Moonshot AI’s July unveiling of a competitive, cost-effective AI model, which strengthened China’s standing in the global AI arena. Yardeni identified three key factors contributing to the underperformance. Firstly, China’s economy is grappling with sluggish consumption, deflation, high youth unemployment, and a housing market in its fifth year of decline.

The protracted property slump has diminished household wealth and curtailed local government revenues from land sales, thereby stifling economic activity. Secondly, major equity indices in China lack the concentrated presence of AI hardware manufacturers that fuel the growth of regional markets. In comparison, South Korea and Taiwan benefit from the robust presence of semiconductor suppliers such as Samsung Electronics, SK Hynix, and TSMC, which play a pivotal role in global AI infrastructure investments.

China’s AI strengths lie predominantly in models and applications, while domestic hardware companies are primarily traded outside the major benchmarks. Thirdly, regulatory uncertainty continues to dissuade investors in China, following Beijing’s technology crackdowns, including its interference in Alibaba affiliate Ant Group’s planned stock listing.

Additionally, US-China tensions and potential American restrictions on advanced chip exports and investments have further dampened investor sentiment. Despite strong profit growth of nearly 26% in the second quarter for onshore-listed Chinese companies, their strongest quarterly increase in five years, the MSCI China index’s forward price-to-earnings ratio has slipped to 10.2 from 11.7 in mid-May.

The weakness endures even after announcing robust earnings. Yardeni cautioned that China’s reliance on AI-related exports could pose another risk. Nomura estimates that semiconductors, computers, and related products account for about half of China’s export growth. A downturn in global AI spending could adversely affect China’s economy, notwithstanding the fact that its broader stock market has lagged behind the rally in other Asian markets.