The Chinese stock market is experiencing one of its sharpest declines in recent years. The STAR50 index, which brings together leading issuers in artificial intelligence, semiconductors, and robotics, has lost 40% of its value in less than four months, leading to a reduction in the capitalization of its constituent companies by approximately $480 billion. Concurrently, the CSI300 blue-chip index has dropped about 20% from its June highs. By comparison, the US Nasdaq has lost only about 6% since reaching its all-time peak three weeks ago. Thus, the Chinese market, which in the summer demonstrated a multiple growth in tech company capitalization in a matter of days, has lost up to half of its accumulated value by autumn.
Who Suffered the Most
The sell-off has affected even those companies that enjoyed frantic demand as recently as August. Shares of robot manufacturer Unitree Robotics, for whose IPO in August there were 8,000 times more buyers than the offering volume, have halved in price since going public. Memory manufacturer CXMT has lost over a quarter of its capitalization in the past month. AI chip suppliers MetaX and Moore Threads Technology, which saw their quotes surge by 700% and 400% respectively during their debut phase last year, have lost half of their market value since July. A particular blow was dealt to optical component makers Zhongji Innolight and Eoptolink Technology: the threat of a ban on the use of their products in US national data centers led to a decline in their share prices by about 60% compared to the first two months of summer.
Causes of the Sell-off and Market Structure
There was no clear-cut trigger for the onset of mass sell-offs in China. Market participants cite inflated prices, tax bills, and the threat of a ban on using Chinese-made data center equipment in the US and other countries as likely factors. According to Goldman Sachs, AI-related stocks account for up to 42% of the Chinese market's capitalization, and their share in A- and H-share trading turnover in mainland China and Hong Kong reaches 57%. The high concentration of capital in the technology sector has manifold magnified the consequences of the sell-off. At the same time, the local stock market is formed mainly by retail investors, and few of them have managed to avoid significant losses in recent months. During the rally phase, retail investors were supported by the idea that major market players were backed by the state, but now a significant portion of them are moving into defensive assets.
Authorities' Reaction and Investor Complaints
The Chinese authorities are making efforts to reduce stock market volatility by restricting high-leverage margin trading and high-frequency automated trading. Local investors have already complained that the AI boom has distorted the structure of the Chinese stock market: an increase in the weight of technology stocks in key indices leads to a skew in capital allocation. According to them, bubbles are forming in certain sectors, while a severe capital outflow is observed in others. Beijing fund manager Dong Baozhen described the situation as follows: "The stock market turned into a crazy speculative bull. And now we are seeing the bubble burst."
Bargain Hunting or Continuing Decline?
Investors are divided on future trends. Some market participants believe that the STAR50 index retains potential for further decline, and it is premature to talk about hitting the bottom. Nevertheless, many companies that were preparing for an IPO are now forced to suspend their plans. Goldman Sachs and BNP Paribas Securities, conversely, maintain recommendations to keep Chinese issuers' shares in investment portfolios; the former mentions Innolight and CXMT among companies whose stocks are recommended for purchase. Other investors are convinced that all Chinese manufacturers will sooner or later face a price war, and chipmakers and infrastructure component suppliers will not escape this fate. In this sense, they believe all bubbles inevitably burst, and the current correction may become just the first stage of a deeper market restructuring.
