China's AI Stock Bubble Bursts as STAR50 Tumbles 40%

China's broad blue-chip index has fallen about 20% from its June high. Reuters said there was no clear trigger for the China selloff, though traders pointed to high valuations, tax bills and the threat of foreign bans on Chinese data-center equipment.

Goldman Sachs says AI stocks account for 42% of China's market capitalization and 57% of trading turnover, leaving investors exposed to the downturn. The collapse comes as global tech stocks teeter, and concerns about AI demand and curbs on Chinese exports weigh on valuations.

Beijing's push to break with a long boom-bust pattern and produce a "slow bull" market has stalled. The rally had run for two years since economic stimulus promises sent shares higher. Dong Baozhen, a Beijing-based fund manager, said: "The stock market later evolved into a speculative crazy bull. And now we see the bubble bursting."

Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong, said the downturn "is now going to put a stop for many of the companies trying to get themselves listed." Leo Wang, partner at Beijing-based Qianchuang Capital, said overemphasizing the "technology content" — the weighting of tech companies by market value in major indexes — leads to a deviation, even a distortion, in capital behavior. He said this created a severe bubble in some sectors and a serious drain on others.

Wang Zhuo, a fund manager and partner at Shanghai Zhuozhu Investment Management, said chipmakers and AI suppliers will eventually end up in a price war, "just like all other Chinese manufacturers." "There's no exception," he said. "All bubbles inevitably burst."

Editor's Summary China's AI-led stock rally has reversed sharply, with the STAR50 down 40% and $480 billion in value erased as high valuations and export concerns hit sentiment. The drop has ended a two-year market advance and complicates Beijing's effort to foster a stable "slow bull" market. It also threatens listings and exposes the market's heavy reliance on AI shares.