Why China's AI stocks are taking a beating
What's the story
China's artificial intelligence (AI) stocks have taken a major hit, with the country's Nasdaq-style Star50 Index plunging nearly 40% in the current half-year. This makes it the world's worst-performing major tech index. Major chipmakers such as MetaX Integrated Circuits Shanghai Co. and Moore Threads Technology have lost nearly half of their value during this period.
Market trends
ChiNext index's decline
The ChiNext index, which also tracks hardware stocks, has witnessed a 36% decline.
This marks a stark contrast from earlier this year, when the Star50 saw an impressive rally as investors overlooked high valuations in favor of Beijing's policy push and the global AI boom.
However, concerns over future demand and earnings prospects have hit Chinese stocks hard, given their heavy reliance on equity financing.
Expert opinion
Implications for China
Leonid Mironov, a portfolio manager at Gavekal Capital, said that if technology stocks continue to be under pressure for a long time, it would be much harder for China to achieve its AI ambitions.
He also warned that if this weakness continues for more than six months, it would make fundraising difficult and suggest that the market is unimpressed with the technological progress being achieved.
Market fluctuations
Star50 index's surge and subsequent decline
Between April and June, the Star50 surged some 75%, outpacing Korea's Kospi, on hopes of Chinese firms' technological breakthroughs and strong state support.
The index traded at over 80 times forward earnings at its peak on June 30.
However, as sentiment abruptly shifted, these high valuations have become a liability for the sector.
Market impact
Foreign investors' impact on Chinese local stocks
Bloomberg Intelligence analysts Jason Liao and Marvin Chen noted that the global AI-hardware selloff, which has affected the Nasdaq and Korea, hit China A-shares hardest after foreign investors flocked to the sector in Q2.
Outflows from a trading link with Hong Kong, allowing foreign investors access to Chinese local stocks, totaled an estimated 90 billion yuan ($13.5 billion) in Q3, the biggest in a year.
IPO performance
Impact on trading debuts
The recent selloff has also affected some of China's hottest trading debuts. Memory-chip giant CXMT which went public in July, has fallen 27% from its post-listing peak. Similarly, robotics firm Yushu Technology lost around 50% from an August high shortly after its initial public offering.
Fundraising efforts
Capital markets challenge for China
Chinese companies have raised a total of $37 billion from onshore IPOs this year, the highest annual proceeds in three years.
Tech firms accounted for over a third of these funds.
However, the underperformance of China's tech shares poses a challenge for authorities who are keen to use capital markets to fuel their growth.