While global tech stocks teeter, in China they have already crashed as lofty valuations collapse amid concerns about AI demand and restrictions on Chinese exports.
The meltdown, which has sent the mainland STAR50 index of AI and semiconductor leaders down 40% in less than four months and wiped out some $480 billion in market value, is an ill omen for wobbly global markets and a dampener on China's efforts to encourage savers into stocks to fund the AI boom.
It has also slammed the brakes on a rally that had run for two years, since promises of economic stimulus sent shares soaring, and stalled Beijing's push to break with a long boom-and-bust pattern and drive a "slow bull" market that delivers reliable performance. China's broad blue-chip index, the CSI300, has dropped about 20% from the highs reached in June.
"The stock market later evolved into a speculative crazy bull," said Beijing-based fund manager Dong Baozhen. "And now we see the bubble bursting."
The reversal reflects a rally that reached greater heights than markets in the West or elsewhere in Asia, and contrasts with a mere prick to US AI stocks, which have led a 6% drawdown in the Nasdaq from a record high reached three weeks ago.
There has been no obvious trigger for the sell-off in China, although traders said high prices, tax bills and the threat of the US or other nations banning Chinese equipment from data centres had all contributed.
With AI stocks accounting for 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 investors in a market dominated by small investors have escaped the pain.
Retail favourites slide
Shares in robot-maker Unitree, which was 8,000 times oversubscribed by retail buyers at its listing, have halved since trading began in August, while chipmaker CXMT has lost more than a quarter of its value in the past month.
Chipmakers MetaX Integrated Circuits and Moore Threads Technology, which surged 700% and 400% respectively on their market debuts last year, have also halved in value since July.
Chen Wensheng, a small business owner and investor from China's southern island province of Hainan, said he bought into the rally, encouraged by what he saw as official support for companies such as Unitree, which counted state-backed funds among its investors. But Chen and his friends are now nursing losses.
Frustration that an investment theme backed by Beijing has ended so badly has driven many investors towards defensive assets and is likely to slow equity fundraising by tech firms.
Shares in optical components makers Zhongji Innolight and Eoptolink Technology are down roughly 60% from highs reached in June and July, partly as Washington moves towards banning the companies, once market darlings, from supplying US data centres.
With the STAR50 index still trading at around 100 times trailing earnings, albeit down from a peak of nearly 250, investors are comparing it with the Nasdaq 100's valuation multiple of 30 and worrying that the sell-off could get worse before it gets better.
"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.
All bubbles inevitably burst
The frenzy and its fallout contrast with efforts by the authorities to improve returns and dampen volatility by cracking down on leverage and high-frequency trading. State-backed investors sold into rallies to keep gains in check.
China's market regulator, the China Securities Regulatory Commission, did not immediately respond to questions faxed by Reuters last week.
The regulator said on its website that its chairman, Wu Qing, had met market participants earlier this month to hear suggestions on improving capital markets. Some in the investment community say the boom has been bad for the market's structure.
"Overemphasising the 'technology content' — that is, the weighting of tech companies by market value in major indices — leads to a deviation, even a distortion, in capital behaviour," said Leo Wang, a partner at Beijing-based Qianchuang Capital.
"This created a severe bubble in certain sectors and a serious drain on others."
Some see value in the sell-off, arguing that it is neither surprising nor detrimental to market reforms geared towards the long term, which have gained traction in boosting returns, particularly income, in recent years.
Although they have been net sellers over the past three months, Asia funds in general remain overweight on China, according to HSBC research.
Goldman Sachs included Innolight and CXMT among dozens of Chinese AI stocks on a revised recommendation list published earlier this month, while BNP Paribas Securities strategist William Bratton has said the market offers buying opportunities for cautious investors.
Still, on the mainland, many are looking at other sectors or waiting for valuations to fall further before buying.
"Just like all other Chinese manufacturers, (chipmakers and AI suppliers) will eventually end up in a price war," said fund manager Wang Zhuo, a partner at Shanghai Zhuozhu Investment Management.
"There's no exception," he said. "All bubbles inevitably burst."