China's technology stocks are facing a significant downturn as investors reevaluate the potential profitability of the country's artificial intelligence boom. The STAR 50 Index, which tracks major tech firms on Shanghai's STAR Market, has plummeted over 40% since its peak in July. This decline reflects growing concerns about whether AI investments can deliver returns that justify current high valuations.
The initial sell-off began as investors took profits after a strong rally, but it has since evolved into a broader scrutiny of earnings potential. Benjamin Cavender from China Market Research Group noted that the sell-off started as a valuation correction but has now shifted to a critical examination of earnings in light of AI excitement. The rally in China's technology sector gained momentum with optimism that domestic companies could compete with U. S. counterparts in AI. However, as investors question the speed at which companies can convert AI spending into profits, that optimism has waned.
Despite technology being a bright spot in China's economy, expectations and valuations have outpaced fundamentals, making a correction inevitable. Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, emphasized the need for tech giants to demonstrate how their AI investments translate into earnings. While several AI initial public offerings initially attracted strong demand, enthusiasm has since faded.
The challenges facing China's tech sector extend beyond technology itself. The country's prolonged property downturn has dampened household confidence, and weak consumption continues to impact advertising and e-commerce businesses of major internet platforms. Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investments could further pressure near-term earnings, with long-term monetization prospects still uncertain. He pointed out that Chinese tech stock valuations have reached multi-year lows, which could limit downside, but upside catalysts remain elusive.
Even China's battery giants are feeling the pressure. CATL, a key player in the global electric-vehicle and energy-storage market, reported approximately 59% revenue growth in the third quarter. However, its net profit rose by only about 15%, highlighting the gap between growth and profitability. Benjamin Cavender noted that competition, shifting product mix, and changes to taxes and rebates are squeezing profitability despite CATL's dominant global position.
Not all Chinese tech stocks are equally affected. Brendan Ahern, chief investment officer at KraneShares, observed that companies on Shanghai's STAR Board are benefiting from semiconductor spending by both Chinese and American tech giants. In contrast, Hong Kong-listed stocks are more exposed to sluggish domestic consumption due to their focus on consumer-facing internet platforms.
JPMorgan's Hui pointed out that China's property downturn remains a fundamental obstacle, with households increasingly opting to save in cash rather than invest in equities. Despite this, he sees limited downside for broader Chinese benchmarks, citing relatively undemanding valuations and light positioning among international investors. Some strategists even view the sell-off as an opportunity.
Jason Hsu, chairman and chief investment officer at Rayliant Global Advisors, highlighted that the downturn in Chinese technology stocks has deepened alongside weakness in U. S. equities. Investors are growing more skeptical about returns on AI spending. Hsu suggested that a recovery in American technology stocks could support Chinese equities. However, he cautioned that cheaper valuations alone may not be sufficient for a sustained rebound. Stabilizing earnings, clearer returns on AI spending, and stronger domestic demand are needed for a meaningful recovery.
For investors, the focus in China's technology sector has shifted from rapid growth to the sustainability of profits. As the market continues to adjust, the challenge remains whether growth can be translated into lasting profitability.
