Chinese Markets Shed $2.4 Trillion as AI Valuations Collapse

Chinese equity markets have lost $2.4 trillion in value since May, according to Bloomberg data. This decline coincides with a 40% plunge in the STAR 50 Index, which tracks technology and innovation firms on the Shanghai stock exchange, since June. Other major corporate indexes fell by approximately 20% over the same period.

The sell-off reflects mounting pressure on artificial intelligence valuations. Goldman Sachs reports that AI stocks represent more than 40% of the combined market value in China and Hong Kong. Consequently, depreciation in this sector affects the wider domestic market. The drop indicates that the Chinese economy currently lacks the strength to sustain the rapid growth of its tech industry, despite significant government backing.

Beijing has accelerated investment in the sector. This month, a state-backed AI fund with a capital base of 60 billion yuan began allocating money to domestic developers. However, consumer spending in China remains low. Many tech companies struggle to generate profits because households are reluctant to spend money on new technology. This lack of profitability serves as a primary driver for the recent stock decline.

External threats also weigh on investor sentiment. The United States has banned Chinese humanoid robots, citing national security concerns. Washington is also considering restrictions on Chinese components used in data centers. These measures hurt Chinese exporters, which rely on foreign sales to supplement weak domestic demand.

Dan Wang, China director for the Eurasia Group, attributed the market movement to a combination of factors. "This year, the profit margin is not as good as expected. And the US is raising rates. And China’s domestic demand is so weak," Wang said. She noted that technology firms face general anxiety regarding whether state-backed models can succeed against sluggish consumer spending.

Beijing views robotics as a solution to demographic challenges, including an aging population and a shrinking workforce. However, current demand for robotics comes mostly from government agencies and research institutions rather than households. Products remain too expensive and impractical for general home use. Shares in Unitree, a leading Chinese robot manufacturer, have fallen by half since the company began trading in August.

Policy responses to the market slide have been limited. China has restricted overseas investment in recent months, with new regulations taking effect on December 1. These rules have not yet triggered a surge in domestic investment. Stimulus measures are currently on hold as top Communist Party officials gather for the fifth plenum this week. This meeting will set the agenda for the 21st Party Congress next year, where Xi Jinping is expected to secure a fourth term.

Policymakers view risky economic interventions as hazardous during this politically sensitive period. Wang described potential stimulus as high risk because accountability falls on the officials who propose failed measures. While optimism persists in specific sectors like satellite technology due to military ties, the global AI boom is expected to continue for at least another year. In contrast, China has no major technology initial public offerings scheduled for the near future.