Chinese Tech Slump: STAR 50 Drops 40% as AI Profit Doubts Mount

Shanghai’s technology-focused STAR Market has seen a sharp decline in value over the past few months. The STAR 50 Index, which tracks the 50 largest and most liquid companies on the exchange, has lost more than 40% of its value since reaching its peak in July. This drop reflects a growing investor concern that the rapid expansion of artificial intelligence in China may not yet be generating sufficient profits to support current stock prices.

The selling pressure extends beyond the index to major individual names. CATL, a leading battery manufacturer and a key player in the electric vehicle and energy storage sectors, has lost 37% of its value since the beginning of the year. Despite a dominant global position, the company is facing a squeeze on profitability. In the third quarter, CATL reported revenue growth of roughly 59%, but its net profit increased by only about 15%. Factors such as intense competition, shifting product mixes, and changes to tax and rebate structures are reducing margins.

Benjamin Cavender of China Market Research Group described the initial selling as a valuation correction and profit-taking. However, he noted that the market is now conducting a critical review of whether earnings can justify the excitement around AI. Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, added that investors are closely watching how major tech firms convert heavy AI spending into actual earnings. This scrutiny follows a period of strong demand for AI-related initial public offerings that has since cooled.

The concerns about tech stocks are intertwined with broader economic headwinds in China. The prolonged downturn in the property sector has dampened household confidence and reduced consumption. This weak consumer spending directly impacts the advertising and e-commerce businesses of major internet platforms. Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising investment in AI could further pressure near-term earnings. He pointed out that while Chinese tech stock valuations have reached multi-year lows, which may limit further downside, clear catalysts for an upside remain hard to find.

Market dynamics vary depending on the specific board and listing location. 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 technology giants. In contrast, stocks listed in Hong Kong are more vulnerable to sluggish domestic consumption due to their heavier weighting in consumer-facing internet platforms. Hui identified the property downturn as a fundamental obstacle, noting that households are increasingly keeping savings in cash rather than investing in equities.

Despite the recent weakness, some strategists see potential for a recovery. Jason Hsu, chairman and chief investment officer at Rayliant Global Advisors, suggested that a rebound in U.S. technology shares could support Chinese stocks, given the current skepticism toward AI returns in both markets. Cavender cautioned that lower valuations alone are not enough to drive a lasting rebound. He argued that a sustainable recovery would require stabilizing earnings, clearer returns on AI spending, and stronger domestic demand. The central question for investors has shifted from the speed of growth to the sustainability of profit.