Chinese markets lose trillions as race for AI supremacy with US takes its toll

China's stock markets have lost trillions of dollars amid heightened concerns over the sustainability of the country's AI boom, as it competes with the United States for dominance in the sector. The STAR 50 Index, which tracks technology and innovation companies on the Shanghai stock exchange, has plummeted 40% since June, while other major indexes have dropped by about 20% over the same period.

This decline has wiped out a staggering $2.4tn from the Chinese stock market since May, according to Bloomberg. AI stocks comprise over 40% of the combined stock market value in China and Hong Kong, implying that any decline in their value will reverberate across the entire domestic market. Despite Beijing's efforts to bolster China's technology industries, particularly those leveraging AI, the domestic economy may not be able to sustain a booming market.

The Chinese government has heavily invested in AI, including a recent 60bn yuan state-backed AI investment fund. However, consumer reluctance to spend on technology and the absence of a strong domestic demand base are causing many tech companies to struggle with profitability. The lack of profits and the possibility of bans from the US, particularly on AI-related technologies and components for data centers, are contributing to the sell-off.

The US has already prohibited humanoid robots in China, citing national security risks, and is reportedly considering banning Chinese components in data centers. China's heavy reliance on exports means that restrictions in the US negatively impact domestic companies, which struggle to sell enough products at home. While China is vying with the US for AI supremacy, it has focused on robotics, seeing it as the key to implementing the technology across society and addressing demographic challenges like an aging population and shrinking workforce.

However, the demand for robotics is primarily driven by government agencies and research institutions, not everyday consumers, who find the products too expensive and impractical for home use. Shares in Unitree, China's leading robot-maker, have halved since they began trading in August. While there is optimism in other technology sectors, such as AI research and satellites, which have strong ties to the military and long-term state support, no blockbuster IPOs are anticipated in China.

Despite calls for stimulus measures to boost investment, policymakers are unlikely to announce such measures during a politically sensitive period, as even if they prove effective, those responsible could face accountability.