In China, the AI bubble has burst

China’s AI and semiconductor stock boom has sharply reversed, with the STAR50 index falling 40% in under four months and wiping out about $480 billion in market value. The selloff follows a speculative rally fueled by expectations of official support and the AI boom, and has dragged the broader CSI300 roughly 20% below its June peak. High valuations, tax bills and the prospect of US or other countries restricting Chinese equipment in data centres have weighed on shares, though traders point to no single trigger. AI stocks had grown to 42% of Chinese market capitalization and 57% of trading turnover, exposing many retail investors to steep losses. Unitree, CXMT and several chip and optical-component makers have plunged; some are also facing export-related risks. The STAR50 still trades at about 100 times trailing earnings, far above the Nasdaq 100’s 30-times multiple.

The reversal threatens Beijing’s effort to build a steadier stock market and encourage household savings to fund technology companies. Investors disappointed that a state-favored investment theme ended in losses are shifting to defensive assets, while some firms may postpone listings and fundraising. Critics say the concentration of capital in high-profile technology companies distorted investment and starved other sectors; the downturn also highlights the risk of future price wars among chipmakers and AI suppliers. Others see the selloff as a potentially useful correction rather than a setback to long-term market reforms, and some global investors remain overweight on China or identify opportunities among selected companies. Onshore investors, however, are largely waiting for lower valuations or considering other sectors before buying back in.