China’s AI stock rally has unravelled, with the mainland STAR50 index dropping 40 per cent in less than four months and erasing about $480 billion in market value, Reuters reported.
The downturn has interrupted a two-year rally and challenged Beijing’s ambition to build a steadier stock market. The broader CSI300 index has fallen about 20 per cent from its June highs.
“The stock market later evolved into a speculative crazy bull,” said Beijing-based fund manager Dong Baozhen. “And now we see the bubble bursting.”
There has been no obvious selling trigger in China, although traders said high prices, tax bills and the threat of the US or other nations banning Chinese equipment in data centres all contributed.
With AI stocks running to 42% of China's market capitalisation and 57% of turnover across mainland-listed A-shares and Hong Kong's H-shares, according to Goldman Sachs, few in a market dominated by small investors have escaped pain.
“This year, the profit margin is not as good as expected,” Eurasia Group’s China director Dan Wang told The Guardian. www.theguardian.com
Shares in robot-maker Unitree, 8,000 times oversubscribed by retail buyers at listing, have halved since they started trading in August, and chipmaker CXMT has lost more than a quarter of its value in the past month.
Chipmakers MetaX Integrated Circuits and Moore Threads Technology, which leapt 700% and 400% respectively on their market debuts last year, have also halved in value since July.
Hainan investor and small business owner Chen Wensheng told Reuters that apparent government backing had encouraged him to buy into the rally. Unitree’s state-backed investors helped strengthen that confidence. He and his friends are now facing losses.
“What's happening is now going to put a stop for many of the companies trying to get themselves listed,” said Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong.
Optical-component makers Zhongji Innolight and Eoptolink Technology have also lost roughly 60 per cent from their June and July highs amid possible US restrictions.
Despite the falls, the STAR50 trades at about 100 times trailing earnings, compared with around 30 times for the Nasdaq 100.
Concerns about speculative investment extend beyond China. At an October 20 conference in New York, Citadel founder Ken Griffin discussed the risks with Bloomberg’s Dani Burger.
“Any radical transformation of our economy is generally intertwined with a bubble,” he said. Griffin also argued that companies surviving such downturns could become lasting market leaders.
Chinese authorities have tried to restrain speculation through tighter controls on leverage and high-frequency trading. State-backed investors have also sold shares during rallies.
China's market regulator, the China Securities Regulatory Commission, did not immediately reply to questions faxed by Reuters last week.
“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,” said Leo Wang, partner at Beijing-based Qianchuang Capital.
“This created a severe bubble in certain sectors and a serious drain on others.”
Some investors, however, see opportunities in the lower prices.
Although they have been sellers over the past three months, Asia funds in general are overweight on China, according to HSBC research.
Goldman Sachs has Innolight and CXMT among dozens of Chinese AI stocks on a revamped recommendation list it published earlier this month, and BNP Paribas Securities strategist William Bratton has said the market offers buying opportunities for the careful.
Others remain wary of further losses and tougher competition.
“Just like all other Chinese manufacturers, (chipmakers and AI suppliers) will eventually end up in a price war,” said fund manager Wang Zhuo, partner at Shanghai Zhuozhu Investment Management.
“There's no exception,” he said. “All bubbles inevitably burst.”