China tech shares tumble on AI profit doubts

The STAR 50 Index has dropped more than 40% since reaching its high in July. This decline marks a sharp reversal for Chinese technology firms that had recently outperformed global peers. The index tracks 50 major companies on Shanghai’s STAR Market, a hub for semiconductor and AI firms.

Investors are now scrutinizing whether the country’s artificial intelligence boom can generate enough profit to support current stock prices. Benjamin Cavender of China Market Research Group noted that the initial sell-off looked like profit-taking. However, the market has since shifted to a critical review of whether earnings can justify the hype. Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, added that large tech groups need to show how heavy AI spending turns into actual revenue.

The pressure extends beyond pure tech plays. Battery maker CATL has lost 37% of its value since the start of the year. The company reported roughly 59% revenue growth in the third quarter. Yet, its net profit rose by only about 15%. Cavender described this gap between growth and profitability as the core issue for CATL. Competition and changes to tax rebates are squeezing margins despite the company’s global standing.

Economic headwinds outside the tech sector are also affecting the market. China’s prolonged property downturn has reduced household confidence. Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investment could pressure near-term earnings. He observed that Chinese tech valuations have hit multi-year lows, which may limit further declines. However, he said clear upside catalysts remain elusive.

Market conditions vary by listing location. Brendan Ahern, chief investment officer at KraneShares, pointed out that STAR Board companies benefit from semiconductor spending by U.S. and Chinese giants. In contrast, Hong Kong-listed stocks face more risk due to their heavy exposure to consumer-facing platforms. Hui noted that households are holding more cash rather than equities because of the property crisis.

Some strategists see potential for recovery. Jason Hsu, chairman of Rayliant Global Advisors, suggested that a rebound in U.S. tech stocks could help lift Chinese shares. Cavender cautioned that lower prices alone are not enough for a sustained rally. He said a lasting recovery requires stable earnings and clearer returns on AI spending. The market is no longer asking how fast companies can grow, but if that growth can become sustainable profit.