Two-year rally over: China's AI bubble has long since burst - with harsh consequences for small investors

Tech stocks in particular have suffered significant losses on Wall Street in recent weeks. But there is no talk of an AI bubble bursting. Things look different on the Chinese stock market. The hype is even greater there, but the picture has clouded over since the summer.

While global tech stocks are reeling, they have already plunged in China. Concerns about demand for AI technologies and restrictions on Chinese exports have caused the speculative bubble in stocks from the artificial intelligence (AI) and semiconductor industries to burst.

The selloff has sent the tech-heavy STAR50 index tumbling 40 percent in less than four months, wiping out about $480 billion in market value. The slump is not only a bad omen for global markets, but also thwarts Beijing's efforts to finance the domestic AI boom with a stable and predictable stock market and encourage savers to invest.

"The stock market turned into a speculative, crazy bull market," says Beijing-based fund manager Dong Baozhen. "And now we're seeing the bubble burst." The reversal follows a two-year rally that far exceeded gains in Western markets. There was no specific trigger for the sell-off. However, traders cited a mix of stretched valuations, pending tax payments and looming US export bans on Chinese technology as reasons for the decline.

The crash is hitting retail investors, who dominate the Chinese market, particularly hard. Shares in robot maker Unitree, oversubscribed 8,000 times by private investors when it went public, have halved since their debut in August. The chip manufacturer CXMT lost more than a quarter of its value within a month. Frustration is high as many, like small business owner Chen Wensheng, relied on the Beijing-backed investment theme and are now complaining of heavy losses.

Index remains at 100 times company earnings

The consequences of the crash are likely to be far-reaching. The shares of the former stock market darlings Zhongji Innolight and Eoptolink Technology have collapsed by around 60 percent, also because Washington is considering excluding them from supplying US data centers. "This will deter many companies seeking to go public," said Hong Hao of asset manager Lotus Asset Management. Despite the crash, valuations remain high. The STAR50 index still trades at 100 times company earnings, compared with 30 times for the US Nasdaq 100 index, raising fears of further losses.

The frenzy and its consequences contradict authorities' efforts to ensure more stable returns with a "slow bull market." Critics see the cause in misguided politics. "If the high proportion of technology is overemphasized - i.e. the strong weight of tech companies due to their market capitalization in the major indices - this leads to undesirable developments and even to distortions in investment behavior," explains Leo Wang from Qianchuang Capital. “This has created a massive bubble in some industries, while significant capital has been withdrawn from others.”

Some experts also see opportunities in the sell-off. Others are more cautious and expect price wars. Like all other Chinese manufacturers, chip manufacturers and AI companies also have to face competition, comments fund manager Wang Zhuo. "There is no exception. All bubbles are bound to burst."