China’s tech rally began with a jolt of national confidence. Now a spreadsheet is cross-examining it.
The STAR 50 Index has dropped more than 40% from its July peak. The index tracks 50 of the largest, most liquid companies on Shanghai’s tech-focused STAR Market, home to chipmakers and AI firms. CATL, the battery giant often cited as a Chinese tech success story, has fallen 37% since January, according to CNBC’s reporting on the selloff.
Hype meets earnings
DeepSeek’s emergence in early 2025 convinced many investors that Chinese firms could rival U.S. AI leaders. Valuations followed that belief. Now the market wants proof of profit.
Benjamin Cavender of China Market Research Group says the drop began as profit-taking. It has since become a hard look at earnings. Expectations ran ahead of fundamentals, he argues, so a correction was due.
Tai Hui of JPMorgan Asset Management points to the IPO market. Several AI listings drew strong demand at first, then lost momentum. In his reading, investors bought the theme before they checked the balance sheet.
Profits may get worse before they improve. Vey-Sern Ling of Union Bancaire Privée expects rising AI investment to weigh on near-term earnings. Long-term monetization stays unclear. AI spending flows into factories and power capacity, and that bill lands before the revenue does.
CATL’s margin problem
CATL looks out of place in an AI story, yet its numbers show the same strain. Third-quarter revenue grew roughly 59%. Net profit rose only about 15%.
Competition, a shifting product mix, and changes to taxes and rebates are squeezing margins. CATL still leads its industry globally. Cavender calls the issue a gap between growth and profitability.
That gap points to a wider problem for Chinese tech manufacturers. Fast expansion does not guarantee fatter margins.
Two markets, two exposures
Not every corner of the market hurts equally. Brendan Ahern of KraneShares says STAR Board companies benefit from chip spending by Chinese and American tech giants. They sell the picks and shovels, so their demand story is clearer.
Hong Kong-listed stocks carry a different load. They lean toward consumer internet platforms, which depend on a weak domestic economy. The property slump has dented household confidence. Advertising and e-commerce revenue suffer as a result. Households also park more savings in cash than in stocks.
The U.S. connection
Jason Hsu of Rayliant Global Advisors says the biggest driver is the U.S. market selloff. Investors worldwide have grown skeptical about returns on AI spending. Chinese tech now moves with that global mood.
The doubt reaches the top of the industry. OpenAI cut its valuation target after some investors pushed back on the price. Analysts still disagree on whether AI valuations form a bubble. Goldman Sachs Research has argued that they do not.
A recovery in American tech stocks could lift Chinese shares in turn.
Is there a floor?
Some strategists think so. Ling notes that Chinese tech valuations sit at multi-year lows, which should limit further losses. Upside catalysts remain scarce, he adds. Hui also sees limited downside for broader benchmarks, citing modest valuations and light positioning among international investors.
Cheap stocks alone will not trigger a rebound. Cavender says the recovery needs three things: steadier earnings, clearer returns on AI spending and stronger domestic demand.
The takeaway
The question for China’s tech sector has changed. For two years, investors asked how fast these companies could grow. Now they ask whether that growth turns into profit. The market has stopped paying for ambition, and it wants the earnings first.
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