In China, the AI Bubble Has Already Burst

While global tech stocks teeter, in China they have already crashed as lofty valuations collapse under worries about AI demand and curbs on Chinese exports.

The meltdown, tanking the mainland STAR50 index of AI and semiconductor leaders by 40 percent in less than four months and vaporising some $480 billion in market value, is an ill omen for wobbly world markets and a dampener on China's efforts at encouraging its savers into stocks to fund the AI boom.

It has also slammed the brakes on a rally running two years, since economic stimulus promises sent shares soaring, and has stalled Beijing's push to break with a long boom-bust pattern and drive a "slow bull" market that delivers reliable performance. China's broad blue-chip index has dropped about 20 percent from highs made in June.

"The stock market later evolved into a speculative crazy bull," said Beijing-based fund manager Dong Baozhen. "And now we see the bubble bursting."

The reversal reflects a rally that ran to higher heights than markets in the West or elsewhere in Asia, and compares with a mere prick to US AI stocks, which have led a 6 percent drawdown in the Nasdaq from a record high scaled three weeks ago.

There has been no obvious selling trigger in China, although traders said high prices, tax bills and the threat of the US or other nations banning Chinese equipment in data centres all contributed.

With AI stocks running to 42 percent of China's market capitalisation and 57 percent of turnover across mainland-listed A-shares and Hong Kong's H-shares, according to Goldman Sachs, few in a market dominated by small investors have escaped pain.

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Shares in robot-maker Unitree, 8,000 times oversubscribed by retail buyers at listing, have halved since they started trading in August, and chipmaker CXMT has lost more than a quarter of its value in the past month.

Chipmakers MetaX Integrated Circuits and Moore Threads Technology, which leapt 700 percent and 400 percent respectively on their market debuts last year, have also halved in value since July.

Chen Wensheng, a small business owner and investor from China's southern Hainan, said he bought into the rally emboldened by what he felt was official support for the likes of Unitree, which counted state-backed funds as investors. But Chen and his friends are now nursing losses.

Frustration that an investment theme backed by Beijing has ended so badly has driven many investors into defensive assets and is likely to slow equity fundraising by tech firms.

Shares in optical parts makers Zhongji Innolight and Eoptolink Technology are down roughly 60 percent from highs in June and July, in part as Washington moves towards banning the one-time darlings from supplying US data centres.

With the STAR50 index still at around 100 times trailing earnings, albeit down from a high of nearly 250, investors compare the Nasdaq 100's multiple of 30 and worry the selloff could get worse before it gets better.

"What's happening is now going to put a stop for many of the companies trying to get themselves listed," said Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong.

'All Bubbles Inevitably Burst'

The frenzy and its fallout contrast with a push by authorities to improve returns and dampen volatility by cracking down on leverage and high-frequency trading. State-backed investors were sellers into rallies to keep gains in check.

China's market regulator, the China Securities Regulatory Commission, did not immediately reply to questions faxed by Reuters last week.

CRSC Chairman Wu Qing met with market participants earlier this month to hear suggestions on improving capital markets, the regulator said on its website, and some in the investment community say the boom has been bad for the market's structure.

"Overemphasising the 'technology content' — that is, the weighting of tech companies by market value in major indexes — leads to a deviation, even a distortion, in capital behaviour," said Leo Wang, partner at Beijing-based Qianchuang Capital.

"This created a severe bubble in certain sectors and a serious drain on others."

Some see value in the selloff, saying it is neither surprising nor detrimental to market reforms that are geared for the long term and have gained traction in driving up returns, particularly income, in recent years.

Although they have been sellers over the past three months, Asia funds in general are overweight on China, according to HSBC research.

Goldman Sachs has Innolight and CXMT among dozens of Chinese AI stocks on a revamped recommendation list it published earlier this month, and BNP Paribas Securities strategist William Bratton has said the market offers buying opportunities for the careful.

Still, on the mainland many are looking at other sectors or for even lower valuations before they turn buyers.

"Just like all other Chinese manufacturers, (chipmakers and AI suppliers) will eventually end up in a price war," said fund manager Wang Zhuo, partner at Shanghai Zhuozhu Investment Management.

"There's no exception," he said. "All bubbles inevitably burst."

© Thomson Reuters 2026