China’s STAR50 index, which tracks companies in artificial intelligence and semiconductors, has fallen about 40% in under four months, eliminating roughly $480 billion of market value, according to Reuters.
The drop from July’s peak is substantially larger than the recent correction in US tech shares: the Nasdaq has fallen about 6% from its record reached three weeks earlier. Broader Chinese benchmarks have also weakened: the CSI300 index is about 20% below its June peak.
What drove the sell-off?
Traders who spoke to Reuters did not point to a single triggering event. Several factors likely contributed:
- high share prices and valuation concerns;
- tax payment pressures on investors;
- doubts about the underlying demand for AI products and services;
- potential export controls and other restrictions targeting Chinese technology.
Investors are also worried that the United States or other countries could bar certain Chinese equipment from their data centers.
How large is the tech sector’s market presence?
Goldman Sachs data show that AI- and semiconductor-related firms listed on mainland China (A-shares) and in Hong Kong (H-shares) accounted for about 42% of market capitalization and 57% of trading turnover on those combined markets. Because of that weight, the correction has hit a large number of investors.
Examples of notable moves
- Unitree, a robot maker, has seen its shares halve since its August IPO, despite retail offerings being oversubscribed about 8,000 times.
- Chipmaker CXMT lost more than a quarter of its value in one month.
- MetaX and Moore Threads have both roughly halved since July; these two companies’ shares had jumped about 700% and 400% respectively during their debut runs last year.
- Optical components makers Zhongji Innolight and Eoptolink Technology have fallen roughly 60% from their June/July peaks.
The declines at Innolight and Eoptolink are linked in part to US proposals to restrict imports of new models of Chinese optical data-transmission equipment for data centers on national security grounds. Reuters reported in August that Washington views such restrictions as a way to reduce alleged risks of data theft, malware installation and service disruption.
State support and market response
Chinese authorities have previously tried to smooth volatile rises and falls on domestic markets: limits on margin lending, curbs on ultra-fast algorithmic trading, and state-backed investors selling at peaks to temper rallies. Despite these measures, speculative run-ups have recurred and been followed by sharp corrections, which can complicate future capital raising for tech firms.
A small-business investor who spoke to Reuters said he purchased Unitree stock during the rally because he saw apparent state support for the company; he and his acquaintances now face losses.
Geopolitical and macro implications
State incentives for advances in AI, semiconductor manufacturing, robotics and industrial automation are geopolitically significant: China is pushing for leadership in these areas. The US–China technology competition therefore involves both technology development and the fight for market share.
High valuations add another layer of risk. At its peak the STAR50 group’s price-to-earnings ratio was nearly 250 times annual earnings; even after the fall it remains about 100 times, compared with roughly 30 times for the Nasdaq 100. That has left some investors concerned about further downside.
The G7 has noted that the anticipated spending increases by major technology firms are already priced into many suppliers’ shares, meaning a slowdown in the pace of that spending could trigger falls. Yet the market reaction is mixed: some analysts view the declines as buying opportunities, while others expect more pressure or fear that Chinese chipmakers and AI suppliers will face margin compression as they compete on price.
Market views and outlook
- Goldman Sachs included Innolight and CXMT on an updated recommendations list in October.
- William Bratton, a strategist at BNP Paribas Securities, sees selective buying opportunities for cautious investors.
- Other asset managers expect further declines or worry that Chinese suppliers will be forced into price competition similar to other manufacturing sectors.
Hong Hao, head of investments at Lotus Asset Management in Hong Kong, said the recent events could derail plans for many companies preparing to go public, as investors become less willing to back riskier listings.
Conclusion
The steep fall in STAR50 and the heavy devaluation of related companies underscore risks in China’s tech-led rally: lofty valuations, geopolitically driven trade restrictions and uncertainty over real demand all played a role. The correction may make fundraising harder for tech firms and leaves markets debating whether the sell-off presents selective buying opportunities or the start of a more prolonged downward adjustment.
