China’s artificial intelligence and semiconductor stocks have suffered a sharp sell-off, with the mainland’s STAR50 index falling 40% in less than four months and losing about $480 billion in market value, according to Reuters. The downturn has intensified concerns about stretched valuations, uncertain demand for AI-related products and potential restrictions on Chinese technology exports. It has also complicated Beijing’s efforts to encourage domestic investors to support the country’s technology sector through the stock market. The decline marks a reversal of a rally that began about two years ago after economic stimulus promises boosted investor confidence. China’s CSI300 blue-chip index has also dropped around 20% from its June highs. “The stock market later evolved into a speculative crazy bull,” Beijing-based fund manager Dong Baozhen told Reuters. “And now we see the bubble bursting.” AI stocks lose ground as investors retreat The sell-off has affected some of China’s most closely watched technology companies, including robotics manufacturers and semiconductor firms that attracted intense investor interest during the rally. Shares in robot-maker Unitree, which was reportedly 8,000 times oversubscribed by retail investors at its listing, have lost about half their value since beginning trading in August. Chipmaker CXMT has fallen by more than a quarter over the past month, while MetaX Integrated Circuits and Moore Threads Technology have each lost around half their value since July, according to Reuters. Optical components manufacturers Zhongji Innolight and Eoptolink Technology have also fallen roughly 60% from their June and July highs. Their declines have partly reflected concerns about potential US restrictions on supplying data centres. The pressure has spread across the wider market. According to Goldman Sachs figures cited by Reuters, AI stocks account for about 42% of China’s market capitalisation and 57% of trading turnover across mainland-listed A-shares and Hong Kong-listed H-shares. High valuations raise fears of further losses Despite the recent declines, Chinese AI stocks remain expensive by conventional valuation measures. The STAR50 index is trading at around 100 times trailing earnings, down from a peak of nearly 250 times. By comparison, the Nasdaq 100 has a price-to-earnings multiple of about 30, according to the report. The gap has raised concerns that Chinese technology shares could face further losses if earnings fail to justify their valuations. Investors have also pointed to the possibility of additional restrictions on Chinese technology equipment in overseas data centres, alongside high prices and tax-related pressures, as factors contributing to the downturn. Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong, said the sell-off could hinder companies seeking to enter the stock market. “What’s happening is now going to put a stop for many of the companies trying to get themselves listed,” he told Reuters. Beijing’s market ambitions face a setback The downturn presents a challenge for Chinese authorities, who have sought to build a more stable stock market and encourage households to invest in equities. Regulators have taken steps to curb leverage and high-frequency trading, while state-backed investors have sold shares during rallies in an effort to limit excessive gains. Some market participants argue that the heavy emphasis on technology companies has distorted investment decisions and diverted capital from other sectors. “Overemphasising the ‘technology content’ — that is, the weighting of tech companies by market value in major indexes — leads to a deviation, even a distortion, in capital behaviour,” Leo Wang, a partner at Beijing-based Qianchuang Capital, told Reuters. He said the trend had created severe bubbles in certain sectors while draining investment from others. China’s market regulator did not immediately respond to questions from Reuters. Its chairman, Wu Qing, met market participants earlier in October to hear proposals for improving the country’s capital markets, according to the regulator’s website. Investors divided over what comes next Despite the sell-off, some investors see opportunities in Chinese technology stocks, arguing that lower prices could make selected companies more attractive over the longer term. HSBC research cited by Reuters indicates that Asia-focused funds remain overweight on China, while Goldman Sachs has included companies such as Innolight and CXMT on a revised list of recommended Chinese AI stocks. Other investors remain cautious, expecting valuations to fall further and competition to intensify. Wang Zhuo, a partner at Shanghai Zhuozhu Investment Management, told Reuters that Chinese chipmakers and AI suppliers would eventually face price wars similar to those experienced by other manufacturers. “There’s no exception,” he said. “All bubbles inevitably burst.”