Star 50 Index Slides 40% From July High

Chinese technology shares are falling as investors scrutinize the profitability of the country's artificial intelligence sector. The STAR 50 Index, which tracks 50 major firms on Shanghai's technology-focused exchange, has dropped more than 40% from its peak in July. This decline reflects growing concern that high valuations may not be justified by actual earnings.

Benjamin Cavender of China Market Research Group described the initial sell-off as a valuation correction and profit-taking. He noted that the market is now undergoing a critical assessment of whether earnings can support the excitement surrounding AI. The rally had accelerated earlier in the year after the emergence of DeepSeek in early 2025. That event raised hopes that domestic firms could compete with U.S. counterparts, but optimism has waned as spending remains high relative to profits.

Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, said investors are waiting to see how large tech groups convert heavy AI spending into earnings. He pointed to recent AI initial public offerings that faced strong initial demand before investor enthusiasm cooled. The sector's performance is also being weighed down by broader economic headwinds, including a prolonged property downturn that has reduced household confidence and weak consumption affecting advertising and e-commerce revenue.

Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investment could pressure near-term earnings while long-term monetization stays uncertain. He observed that Chinese tech stock valuations have hit multi-year lows, which limits downside potential, but upside catalysts remain elusive. Ling added that lower unit profitability could hurt near-term results even for dominant global players.

Battery maker CATL exemplifies this profitability squeeze. The company reported roughly 59% revenue growth in the third quarter, but net profit rose only about 15%. Competition, shifting product mixes, and changes to taxes and rebates are eroding margins despite CATL's global lead. Cavender identified the gap between growth and profitability as CATL's primary issue. Ling agreed that lower unit profitability would weigh on near-term earnings.

Market pressures vary by listing location. Brendan Ahern, chief investment officer at KraneShares, noted that companies on Shanghai's STAR Board are benefiting from semiconductor spending by major tech firms in China and the United States. In contrast, Hong Kong-listed stocks face more exposure to sluggish domestic consumption due to their heavier weighting in consumer-facing internet platforms. Hui described the property downturn as a fundamental obstacle, noting that households are keeping more savings in cash rather than equities.

Some strategists see potential opportunities in the current weakness. Jason Hsu, chairman and chief investment officer at Rayliant Global Advisors, said the sell-off in Chinese tech has deepened alongside weakness in U.S. equities. He suggested that a recovery in American technology shares could support Chinese stocks. Cavender cautioned that cheaper valuations alone may not be enough for a lasting rebound, requiring stabilizing earnings, clearer returns on AI spending, and stronger domestic demand.