Chinese tech stocks suffer heavy losses amid AI sector concerns

Chinese equity markets have experienced a significant decline in recent months, with trillions of dollars in value erased as investors grow increasingly anxious about the sustainability of the country’s artificial intelligence boom. The downturn reflects deepening concerns regarding the sector’s ability to generate consistent profits and the escalating geopolitical tensions with Western nations. This financial contraction underscores the challenges Beijing faces in maintaining its competitive edge against the United States in the global race for technological dominance.

The impact on the market has been severe, particularly for technology-focused indices. The STAR 50 Index, which tracks innovation and technology companies listed on the Shanghai stock exchange, has fallen by 40 per cent since June. Broader indices of major companies have also dropped by approximately 20 per cent over the same period. According to Bloomberg, this precipitous decline has resulted in a loss of 2.4 trillion dollars from the Chinese stock market since May. The severity of the drop is amplified by the fact that AI stocks represent more than 40 per cent of the total market value in China and Hong Kong, according to Goldman Sachs. Consequently, any reduction in the value of these assets sends shockwaves through the entire domestic market, affecting a wide range of investors and sectors.

Despite substantial government efforts to bolster the technology industry, the domestic economy appears unable to sustain the current level of market enthusiasm. Beijing has invested heavily in the sector, including the launch of a 60 billion yuan state-backed AI investment fund that began supporting domestic developers this month. However, Chinese consumers have shown a persistent reluctance to spend on technology products, leading to widespread difficulties for tech companies in achieving profitability. This lack of profit generation is a primary driver of the recent sell-off. Additionally, the threat of expanding bans on Chinese technology by Western countries, particularly the United States, has exacerbated investor fears. Dan Wang, the China director for the Eurasia Group, noted that profit margins are lower than expected, US interest rates are rising, and domestic demand remains weak. She described a general anxiety among technology firms regarding the viability of the state-backed model in the face of such economic headwinds.

Geopolitical restrictions have further complicated the outlook for Chinese tech firms. The United States has banned humanoid robots from China, citing national security risks, and is reportedly considering restrictions on Chinese components used in data centres. China’s heavy reliance on exports means that such limitations significantly harm domestic companies, which already struggle to sell sufficient volumes of products within their home market. As part of its strategy to outpace the US in AI, Beijing has focused on robotics, or embodied AI, as a means to deploy technology across society. This sector is also viewed as a solution to demographic challenges, including an ageing population and a shrinking workforce. However, demand for robotics is currently driven by government agencies and research institutions rather than everyday consumers, for whom the products remain too expensive and impractical for household use.

The financial performance of leading firms reflects these structural challenges. Shares in Unitree, a prominent Chinese robot manufacturer, have halved in value since they began trading in August. Wang commented that embodied intelligence does not appear likely to generate profits in the mass market in the near term. While there remains optimism in other technology areas, such as AI research and satellites, the latter benefiting from long-term state support due to military links, the broader AI boom is expected to continue globally for at least another year. In contrast to the US, where Anthropic filed for a potential record-breaking IPO, China has no comparable blockbuster listings on the horizon. Policymakers face pressure to introduce stimulus measures, but none are expected during the current politically sensitive period. With the Communist Party’s fifth plenum approaching to prepare for the 21st Party Congress, there is little appetite for risky policy moves that could destabilise the environment, even if they might boost the economy. Wang warned that any stimulus measure would be high risk, with policymakers facing potential accountability if such initiatives fail to deliver results.