As investors begin to question whether the boom in artificial intelligence in China can generate strong enough profits to support the high valuations, Chinese tech stocks are losing their luster.
The STAR index has fallen by over 40% from its July high, and market concerns regarding the investment returns of AI are continuing to intensify. This index tracks 50 of the largest and most liquid companies on Shanghai's Science and Technology Board, known as the STAR Market, which include companies in the fields of semiconductors, artificial intelligence, and other high-tech industries.
Even CATL, the battery giant long regarded as one of China's success stories in technology, is under pressure, having fallen by 37% since the beginning of the year.
What drove this round of selling?
Initially triggered by profit-taking after a strong rise, the selling pressure has now evolved into a broader re-evaluation: whether the profits are sufficient to support the current valuation.
The Benjamin Cavender from the China Market Research Group stated: "I believe that this round of selling was initially mainly due to valuation corrections and some profit-taking, but now the market is beginning to seriously assess whether the earnings can justify the AI craze."
After DeepSeek rose to prominence in early 2025, the momentum of growth for Chinese technology stocks accelerated, and the market optimistically anticipated that domestic companies would be able to challenge their American counterparts in the field of artificial intelligence.
However, as investors questioned the speed at which companies could convert heavy AI expenditures into profits, this optimistic sentiment has faded.
"Technology remains a highlight in the economy, but expectations and valuations have already surpassed the fundamentals, so a correction is quite likely." Benjamin Cavender China Market Research Group
Tai Hui, the Chief Market Strategist for JPMorgan Asset Management's Asia-Pacific region, stated that investors are eager to see how Chinese technology giants can transform their AI expenditures into profits. He noted that although some AI initial public offerings initially saw strong demand, the enthusiasm subsequently waned.
However, the challenges are not limited to the tech industry alone.
China's ongoing real estate downturn has hit family confidence, while weak consumption continues to drag down the advertising and e-commerce businesses of large internet platforms.
Union Bancaire Priv ee Senior Stock Advisor Vey - Sern Ling warns that an increase in AI investment may further suppress short-term profits, while the long-term liquidity prospects remain uncertain.
"The valuation of Chinese technology stocks has dropped to multi-year lows, which should limit the downside potential. However, it remains difficult to find catalysts for an upside move," he said.
The profitability issues of CATL?
The pressure is also evident on China's leading battery manufacturers.
Driven by the global boom in electric vehicles and energy storage, CATL, one of the main beneficiaries, achieved approximately 59% revenue growth in the third quarter, but its net profit only increased by about 15%.
Despite its dominant global position, intensified competition, changes in product structure, and adjustments to tax and subsidy policies are still squeezing profitability.
"The problem with CATL is the gap between growth and profitability," said Benjamin Cavender.
Ling also warned that even if CATL maintains its leading position globally, a decline in unit profitability could still drag down short-term performance.
The gap between rapid growth and slowing profit growth highlights the broader challenges faced by Chinese technology manufacturers: rapid expansion does not necessarily translate into stronger profit margins.
Will a rebound come?
Not all Chinese technology stocks are facing the same pressures.
KraneShares Chief Investment Officer Brendan Ahern pointed out that companies on Shanghai's Science and Technology Innovation Board are benefiting from the semiconductor spending of Chinese and American technology giants.
At the same time, Hong Kong-listed companies are more susceptible to the impact of weak domestic consumption due to their greater weight on consumer-facing internet platforms.
JPMorgan Chase' Hui indicates that the sluggish Chinese real estate market remains a fundamental obstacle, with more and more families placing their savings in cash rather than stocks.
However, he believes that the downside potential for a broader Chinese benchmark index is limited, due to relatively low valuations and the fact that international investors are not heavily positioned in these assets.
Some strategists even believe that this round of selling may be creating opportunities.
Rayliant Global Advisors Chairman Jason Hsu stated that the selling of Chinese technology stocks has deepened in tandem with the weakening of U.S. stocks, and investors are becoming increasingly skeptical about the returns on AI expenditures.
Therefore, the rebound in U.S. tech stocks could also provide support for the Chinese stock market.
However, Cavender believes that merely having a lower valuation is not enough; to achieve a sustained rebound, it is also necessary for profits to stabilize, the returns on AI expenditures to become clearer, and domestic demand to strengthen.
For investors, the Chinese technology sector is no longer just about how fast a company can grow, but whether that growth can be transformed into sustainable profits.
