China’s AI stock rout wipes out US$480b as valuations collapse

China's artificial intelligence and semiconductor stocks have experienced a sharp sell-off, wiping out approximately US$480 billion in market value over the past four months, highlighting the risks of inflated valuations and growing uncertainty over demand for AI technology. The mainland STAR50 index, tracking major technology and semiconductor firms, has declined by 40% during this period, while China's broader blue-chip index has slipped about 20% from its June peak.

This downturn is particularly significant, with AI-related stocks comprising 42% of China's market capitalization and 57% of turnover across mainland-listed A-shares and Hong Kong-listed H-shares. Beijing's efforts to encourage household investment in equities to support AI ambitions have been threatened by this sell-off, following a two-year rally driven by expectations of economic stimulus and government backing for technology industries.

Fund manager Dong Baozhen described the situation as a "speculative crazy bull" that has now burst. The downturn has been severe, with investors reevaluating lofty valuations due to concerns about AI demand, potential export restrictions, and the possibility of Chinese equipment being barred from overseas data centers. Notable companies such as Unitree, MetaX Integrated Circuits, Moore Threads Technology, Zhongji Innolight, and Eoptolink Technology have suffered substantial losses, with some halving in value from their July highs.

Despite the market correction, the STAR50 index still trades at around 100 times trailing earnings, down from nearly 250 times, compared to the Nasdaq 100's average of about 30 times, signaling that valuations remain stretched. The market downturn may also dissuade technology companies from seeking stock market listings and raising fresh capital.

Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong, noted that many companies attempting to list may now be deterred. While some investors see this correction as an opportunity to acquire selected companies at more attractive prices, others remain cautious, anticipating intensified competition among Chinese manufacturers, which could lead to price wars and pressure on profits.