China's Market Collapse: AI Valuations Plunge as State Fund Fails to Halt Selloff

Chinese equity markets have lost $2.4 trillion in value since May, a decline driven by falling confidence in the sector's profitability and intensifying competition with the United States. The STAR 50 Index, which tracks technology and innovation firms on the Shanghai exchange, has fallen 40% since June. Other major indexes for large companies have dropped by approximately 20% over the same period.

The sell-off is concentrated in artificial intelligence, a sector that accounts for more than 40% of total stock market value in China and Hong Kong, according to Goldman Sachs. This concentration means that declines in AI valuations ripple through the entire domestic market. Dan Wang, the China director for the Eurasia Group, described a "general anxiety" among technology firms regarding whether state-backed models can succeed against weak consumer demand.

Beijing has attempted to counter the slump with a 60 billion yuan state-backed AI investment fund that began capitalizing domestic developers this month. However, the capital has not yet translated into broad market stability. Wang noted that profit margins this year are lower than expected, while the United States raises interest rates and domestic demand remains fragile. She stated, "This year, the profit margin is not as good as expected. And the US is raising rates. And China’s domestic demand is so weak."

External pressure from the United States compounds the domestic challenges. Washington has banned humanoid robots from China on national security grounds and is considering restrictions on Chinese components in data centers. These export limits hurt Chinese firms that rely on overseas sales, as they struggle to sell enough products within the country to sustain operations.

The government has prioritized robotics, or embodied AI, as a solution to demographic issues such as an aging population and shrinking workforce. Yet, demand is currently driven by government agencies and research institutions rather than consumers, for whom the products remain expensive and impractical for home use. Shares in Unitree, a leading robot manufacturer, have halved since they began trading in August. Wang observed that it does not look like embodied intelligence could turn into profits in the mass market.

Policymakers face constraints on introducing new stimulus measures. The top officials of the Chinese Communist Party are gathering this week for the fifth plenum to lay the groundwork for the 21st Party Congress, where Xi Jinping is expected to secure a fourth term. Wang warned that any stimulus would be "high risk" because the architect of the policy would be held accountable if it failed. Consequently, officials are avoiding risky policy moves during this politically sensitive period.