China's AI tech stock bubble bursts: STAR 50 plunges 40% over nearly four months, wiping out about $480 billion in market value

It has also slammed the brakes on a two-year rally that began with a surge in stock prices driven by promises of economic stimulus, and that has stalled Beijing's efforts to break the long-standing "boom-and-bust" cycle and build a "slow bull" market. China's blue-chip CSI 300 index has fallen about 20% from its June high.

"The stock market later evolved into a speculative, frenzied bull market," said Beijing fund manager Dong Baozhen. "Now we see the bubble bursting."

The reversal comes against the backdrop of gains in Chinese markets that had been far larger than those in Western and other Asian markets, in contrast to US AI stocks, which were only "lightly pricked" — the Nasdaq index has pulled back 6% from the record high it set three weeks ago. In China, there was no obvious trigger for the sell-off, but traders said high prices, tax bills, and the threat that the US or other countries could ban Chinese equipment from data centers all played a role. According to Goldman Sachs data, AI stocks already account for 42% of China's market capitalization and 57% of trading value in mainland A-shares and Hong Kong H-shares, and in a market dominated by retail investors, few can escape.

Retail favorites have fallen sharply. Robot maker Unitree Technology was 8,000 times oversubscribed by retail investors at its listing, but its share price has halved since it began trading in August; chipmaker ChangXin Memory Technologies has lost more than a quarter of its market value over the past month. Chip companies MetaX and Moore Threads, which surged 700% and 400% respectively on their first trading day last year, have also halved since July.

Chen Wensheng, a small business owner and investor from Hainan, said he entered the rally because he felt there was official support for companies like Unitree Technology, whose shareholders include state-backed funds. But now he and his friends are bearing losses. The frustration that an investment theme backed by Beijing has ended so badly has pushed many investors toward defensive assets and could also slow the pace of equity financing for tech companies. Shares of optical component makers Zhongji Innolight and Eoptolink are down about 60% from their June and July highs, partly because Washington is pushing to ban these former star companies from supplying US data centers.

The STAR 50 index still trades at a price-to-earnings ratio of about 100 times; although it has fallen from a high of nearly 250 times, investors compare it with the Nasdaq 100's valuation of 30 times and worry that the sell-off could worsen before it improves. "What is happening now will stop many companies trying to list," said Hong Hao, managing partner and chief investment officer of Hong Kong-based Hao Capital.

The frenzy and its aftermath stand in contrast to regulators' efforts to improve returns, curb volatility, and crack down on leverage and high-frequency trading. State-backed investors sold during the rally to suppress gains. The China Securities Regulatory Commission did not immediately respond to questions Reuters sent by fax last week. The regulator's website shows that CSRC Chairman Wu Qing met with market participants earlier this month to hear suggestions on improving the capital market. Some in the investment community believe the boom has damaged the market structure.

"Overemphasizing the 'tech content' — that is, the weight of tech companies in the market capitalization of major indexes — will lead to deviations and even distortions in capital behavior," said Leo Wang, a partner at Beijing Qianchuang Capital. "This has created severe bubbles in some sectors while leaving others severely starved of capital."

Others see value in the sell-off, saying it is neither surprising nor damaging to long-term reforms that in recent years have made progress in improving returns, especially earnings. HSBC research shows that although Asian funds have been net sellers over the past three months, they remain overweight China. In an updated recommendation list released earlier this month, Goldman Sachs included dozens of Chinese AI stocks such as Zhongji Innolight and ChangXin Memory Technologies; William Bratton, a securities strategist at BNP Paribas, also said the market offers buying opportunities for cautious investors. In the mainland, however, many people are still watching other sectors or waiting for lower valuations before they are willing to act.