China's artificial intelligence bubble has burst

While global investors speculate on whether AI stocks are overvalued, China's market has already seen a painful correction. The STAR 50 index, which includes major technology and semiconductor companies, has lost 40% of its value in less than four months, wiping out about 429 billion euros in market capitalization.

The decline is not limited to a handful of companies. The broader CSI 300 index of China's largest companies has lost about 20% since its June peak, halting a nearly two-year rally in stock prices.

The excitement over artificial intelligence has boosted interest in chip, robotics and optical component makers in recent months. Valuations for many companies have risen faster than their actual earnings. As doubts about future demand and potential new U.S. restrictions have emerged, investors have started selling.

Tax obligations and uncertainty about access for Chinese equipment to foreign data centers also added to the pressure. Reuters notes that despite the sharp drop, the STAR 50 index still achieves a valuation of about 100 times past annual earnings, while the comparable indicator for the Nasdaq 100 is around 30.

The decline is unpleasant for Chinese authorities, who wanted to encourage households to invest their savings in stocks for the long term and thus support domestic technology companies.

The stock market crash in itself does not mean the collapse of China's AI. It mainly means that investor expectations have far outpaced the companies' ability to convert growth into profits.