The AI Bubble Has "burst" In China
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Companies lost $480 billion over four months.
China's STAR50 index, which includes the country's leading companies in the artificial intelligence and semiconductor sectors, has plummeted 40% in less than four months, and its market capitalization has shrunk by approximately $480 billion, according to Reuters reports, citing market data. Analysts surveyed by the agency point out that the AI bubble in the Chinese market has burst.
Overvalued companies are seeing their valuations decline amid concerns about demand for AI and restrictions on Chinese exports, Reuters reports. At its peak, the P/E (price-to-earnings) ratio of the STAR50 index approached 250; now it is trading at a P/E of around 100. This is still a high valuation: by comparison, the corresponding multiple for the U.S. Nasdaq 100 technology index is 30, Reuters notes. As a result, investors fear that the sell-off in the Chinese market could intensify before the situation begins to improve.
The Chinese market’s growth had continued for two years on the back of promises of economic stimulus from Beijing, but the current decline has brought that rally to a halt. The CSI 300, a broad index of the Chinese stock market, has entered a bear market, falling more than 20% from its peak in June. The Chinese market had gradually become “speculative and wildly bullish,” and now “we’re watching the bubble burst,” notes Beijing-based fund manager Dong Baozhen.
There was no obvious trigger for the sell-off in China, but traders attribute it to high valuations, tax liabilities, and threats of restrictions on the use of Chinese equipment in data centers by the U.S. and other countries, Reuters reports. According to Goldman Sachs’ estimates, AI-related companies account for 42% of China’s stock market capitalization, as well as 57% of trading volume, among both stocks listed on mainland exchanges and those traded on the Hong Kong Stock Exchange. Given that retail investors dominate this market, few have managed to avoid losses. One of them, Chen Wensheng, said he decided to invest in technology stocks, believing they had the support of the authorities—but has now suffered losses.
For example, shares of robotics manufacturer Unitree have lost about half their value since they began trading on the exchange in August. Demand from retail investors during Unitree’s IPO exceeded supply by a factor of 8,000. Shares of memory chip maker CXMT have fallen by more than 25% over the past month, while shares of chipmakers MetaX Integrated Circuits and Moore Threads Technology have also lost half their value since July.
The crash in China has sent a warning signal to global markets and dealt a blow to Beijing’s efforts to channel household savings into the stock market to finance the AI boom, Reuters reports. Hong Hao, managing partner at Lotus Asset Management in Hong Kong, believes that under these conditions, many companies will postpone their plans to go public. A partner at Shanghai Zhuozhu Investment Management adds that Chinese chipmakers and AI developers will eventually face a price war—that is, fierce competition accompanied by falling prices. “There are no exceptions; all bubbles inevitably burst,” he added.
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