China AI stocks tumble 40% as investors reassess valuations

China's AI-focused STAR 50 Index has lost over 40% of its value in the past four months, erasing roughly US$480 billion in market capitalisation. The decline follows a two-year rally that was driven by strong investor enthusiasm for artificial-intelligence technologies.

Stephen Wong, an executive committee member of the Greater China Chapter of the Chartered Alternative Investment Analyst Association, said the sell-off reflects a "repricing of expectations" and is increasing scrutiny of monetisation, profitability and capital efficiency.

Despite the price drop, the index still trades at about 100 times the combined earnings of its constituents over the last year, down from a peak near 250 times, indicating that investors continue to pay a premium for future growth.

Kelvin Wong, senior market analyst at OANDA, warned that AI-related stocks account for roughly 42% of market capitalisation and 57% of trading activity across mainland and Hong Kong listings, making the market vulnerable to profit-taking. Gary Ng, senior economist for Asia Pacific at Natixis, added that investors are questioning whether rising demand can translate into higher profits as capital expenditure climbs.

Analysts noted that the correction could make fundraising more difficult for firms with high cash burn and limited revenue, but they expect strategically important companies to retain substantial state backing. Stephen Wong said government support can fund infrastructure and research but does not guarantee sustainable business models for every firm.

Christopher Beddor, deputy China research director at Gavekal Dragonomics, highlighted that the main constraint on China's AI ambitions is access to advanced chips, which is limited by U.S. export controls. While Beijing is developing domestic alternatives, supply shortages remain a challenge.

The sell-off has also sparked speculation about similar risks in other markets. OANDA's Kelvin Wong described the Chinese experience as an early warning about valuation and financing risks, but cautioned that major U.S. tech companies such as Microsoft, Alphabet, Amazon and Meta have established revenue streams that provide a stronger financial base for AI investment. Beddor emphasized that China's market dynamics differ from those in the United States, limiting direct comparisons.

Analysts across the region stress that investors should distinguish between the long-term potential of AI and the valuation of individual securities, noting that diversification across asset classes may still mask concentration in the same underlying technology driver.