The Chinese stock market is experiencing a massive slump in shares of companies linked to artificial intelligence, robotics and microchip manufacturing. In just under four months, the STAR50 technology index has lost around 40% from its July high, whilst total market capitalisation has fallen by approximately $480 billion. The sharp collapse has cast doubt on the inflated valuations of Chinese technology companies and may make it more difficult to attract investment for the development of artificial intelligence.
Chinese technology companies have lost $480 billion
After nearly two years of rapid growth, the Chinese stock market for artificial intelligence-related companies has taken a sharp turn. The STAR50 index, which comprises leading technology and semiconductor firms, has fallen by approximately 40% in less than four months.
The decline has not been limited to individual AI equipment manufacturers. The broad CSI300 stock index, which covers the largest companies in mainland China, has fallen by approximately 20% from its June high.
The situation is markedly different from that of the US market. According to Reuters, the index Nasdaq, in which technology companies play a significant role, has fallen by approximately 6% from the record high set three weeks earlier.
One of the main reasons for the sell-off was investors’ concerns that the market value of Chinese companies was rising much faster than their actual profits.
Further pressure is being exerted by potential restrictions imposed by the US and other countries on the use of Chinese equipment in data centres.
Shares in Unitree and chip manufacturers have fallen sharply in price
One of the most notable examples is a Chinese company Unitree Robotics, known for its humanoid robots and robotic dogs.
On the way out Unitree On the stock exchange in August, demand from retail investors exceeded the number of shares on offer by approximately 8,000 times. However, once trading began, the company’s shares lost around half their value.
Other companies in the technology sector also recorded significant losses.
| Company. | Share price fall |
|---|---|
| Unitree Robotics | Around 50% at the start of trading |
| CXMT | Over 25% in the last month |
| MetaX Integrated Circuits | Around 50% from July |
| Moore Threads | Around 50% from July |
| Zhongji Innolight | Around 60% off the high |
| Eoptolink Technology | Around 60% off the high |
Just last year, graphics processor manufacturers MetaX and Moore Threads saw extraordinary growth during their stock market debuts. Their share prices soared by hundreds of per cent as investors anticipated rapid expansion in China’s artificial intelligence sector.
Much of the previous growth has now evaporated. Companies whose prospects depend on supplying equipment to data centres abroad have been particularly hard hit.
Why are investors talking about an artificial intelligence bubble?
According to Goldman Sachs’ estimates, shares in companies linked to artificial intelligence accounted for 42% of the total market capitalisation of the relevant segment of the Chinese and Hong Kong stock markets. They also accounted for around 57% of trading turnover.
This means that interest in AI became one of the main drivers of the Chinese stock market indices. Technology shares were bought particularly actively by retail investors, who were counting on the rapid growth to continue.
However, even after a sharp fall, the valuations of many companies remain high.
The STAR50 index is trading at a P/E ratio of around 100. This means that the market capitalisation of the companies in the index is approximately 100 times their combined annual profit. At its peak, this figure was close to 250.
By way of comparison, the equivalent ratio for the US Nasdaq 100 is around 30.
This difference suggests that investors are still factoring very high expectations of future profits into the valuations of Chinese technology companies.
Chinese companies may face a shortage of investment
The slump in share prices is causing problems not only for shareholders, but also for technology companies that had planned to raise funds via the stock market.
According to the managing partner of Lotus Asset Management Hong Hao, the situation may force many companies to postpone their IPO.
Start-ups remain particularly vulnerable, as they spend significant sums on AI development, robotics and microchip manufacturing, but have not yet begun to generate stable profits.
The slump has also become a problem for the Chinese authorities. Beijing has sought to develop a stock market characterised by stable, long-term growth, whilst curbing excessive speculation and risky lending.
However, the investment frenzy surrounding artificial intelligence led to a sharp rise in share prices, and the subsequent fall resulted in losses for a large number of retail investors.
Does the fall in share prices signal a crisis across the entire AI industry?
Despite the widespread sell-off, financial analysts are divided on the future prospects of the Chinese technology sector.
Some investors believe that the market has not yet reached its lowest levels and may continue to fall. Others see the fall in share prices as an opportunity to buy shares in promising companies at a lower price.
Goldman Sachs, in particular, has included manufacturers of chips and optical components in its updated list of Chinese technology companies to which it is drawing investors’ attention.
At the same time, market participants are warning of potential price competition amongst Chinese manufacturers of AI equipment, which could erode the profitability of even successful companies.
The slump in share prices does not mean that the development of artificial intelligence in China has come to a halt. However, it demonstrates just how heavily market valuations of technology companies depend on expectations of future growth and investors’ willingness to fund costly research and development.
