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Automatically translated version. May contain inaccuracies compared to the original.
Investors were spooked by inflated prices, doubts about AI demand, and the threat of a ban on Chinese equipment in the US.
Chinese AI and semiconductor stocks plunged sharply: the STAR50 index, which includes leaders in these sectors, has lost about 40% in less than four months. At the same time, Alibaba, ByteDance, Tencent and DeepSeek are raising more than 50 billion dollars this autumn to develop AI. After the crash the market lost roughly 480 billion dollars in value, Reuters reports.
The sell-off was a bad sign for fragile global markets and hit Beijing’s efforts to steer household savings into stocks to finance AI development. It also halted a two-year rally that began when promises of economic stimulus pushed up stock prices. The sell-off stopped growth that had continued for two years since authorities pledged to support the economy. Beijing wanted stocks to rise slowly and steadily, without sharp swings, but that plan failed. The index of China’s largest companies also fell by about 20% from June highs.
“Over time the stock market turned into a frenzied speculative rally. And now we see the bubble popping,” said Beijing-based head of an investment fund Dong Baozhen.
There was no obvious trigger for the sell-off, traders say. Contributing factors included high stock prices, tax payments, and the threat that the US or other countries will ban Chinese equipment in data centers. The Chinese downturn is much deeper than in the West: the US Nasdaq index has fallen only 6% from the record set three weeks ago. According to Goldman Sachs, AI stocks make up 42% of market value and 57% of trading turnover on mainland China and Hong Kong exchanges, so few investors — most of whom are retail — avoided losses.
Shares of robot maker Unitree have halved since trading began in August, while chipmaker CXMT lost more than a quarter of its value over the past month. Chipmakers MetaX Integrated Circuits and Moore Threads Technology, whose shares rose by 700% and 400% on their first day of trading last year, have halved since July. Shares of optical component makers Zhongji Innolight and Eoptolink Technology dropped roughly 60% from their June and July highs. Partly this happened because Washington is moving toward banning them from supplying equipment to US data centers.
Chen Wenshen, a small business owner and investor from the southern province of Hainan, bought shares because he believed companies like Unitree were backed by the state: state funds were among their investors. Now he and his acquaintances are at a loss. Disappointment that a theme supported by Beijing ended so poorly has driven many investors into defensive assets and will likely slow capital raising by tech companies.
Even after the drop, STAR50 index stocks trade at about 100 times companies’ annual earnings, while at the peak they were almost 250. On the Nasdaq 100 this metric is about 30. Investors fear the worst may be yet to come: prices could fall further before they start to rise. According to the Shanghai Stock Exchange, at the end of September the price-to-earnings ratio of STAR50 was 99,48, and for the large-cap CSI300 index it was 14,37.
“What’s happening now will stop many companies trying to go public,” said Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong. Leo Wang, a partner at Beijing’s Qianchuang Capital, believes the overweighting of tech companies in major indices distorted capital behavior. “This created a serious bubble in specific sectors and heavily drained resources from others,” he emphasized.
The market regulator, the China Securities Regulatory Commission, did not respond to questions sent last week. Its chair, Wu Qing, earlier this month met market participants to hear proposals for improving capital markets. During the rally, state investors, conversely, were selling shares to rein in the rise.
The sell-off followed a summer boom: in August Unitree shares were oversubscribed by more than 8 thousand times the offering, and the company raised about 905 million dollars. Risks for Chinese exporters are growing: in July it emerged that the administration of US President Donald Trump plans to ban new Chinese humanoid robots. At the same time demand for AI hardware remains high: ByteDance, Alibaba and Tencent ordered more than 35 billion dollars’ worth of Nvidia GPUs, but will receive no more than 10%.
For an article on how the US and China are competing for investors and the mass AI market, see ZN.UA’s “Who Will First Seize the Mass Artificial Intelligence Market — the US or China?” by economist and financial analyst Oleksii Kushch.
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