(Oct 17): Chinese firms have emerged as the biggest losers of the faltering global artificial intelligence (AI) trade, a setback for Beijing’s efforts to use stock markets to supercharge its ambition of technological supremacy.

The Nasdaq-style Star50 Index has tumbled nearly 40% in the current half year, becoming the world’s worst-performing major tech gauge. Major chipmakers MetaX Integrated Circuits Shanghai Co and Moore Threads Technology Co have both shed around half of their value during this period. 

The ChiNext index, similarly focused on hardware stocks, has lost 36%. 

It marks a reversal of fortunes from earlier this year, when the Star50 enjoyed a stunning rally as investors ignored frothy valuations to bet on Beijing’s policy push and ride the global AI boom. All that enthusiasm has since unravelled as scrutiny of future demand and earnings prospects hit Chinese stocks the hardest, a worrisome development given the heavier reliance on equity financing by the country’s firms.

“It would be much harder for China to achieve its AI ambitions if technology stocks remain under pressure for an extended period,” said Leonid Mironov, a portfolio manager at Gavekal Capital. “If the weakness goes on for more than six months, this will make fundraising difficult and also imply that the market is unimpressed with the technological progress being achieved.”

The Star50 surged around 75% between April and June — beating Korea’s Kospi — on optimism about Chinese firms’ technological breakthroughs and strong state support. The gauge traded at over 80 times forward earnings at its peak on June 30. Yet as sentiment abruptly turned, the sector’s high valuations have become a liability. 

“The global AI-hardware sell-off, spanning the Nasdaq and Korea, hit China A-shares hardest after foreign investors crowded into the sector in 2Q,” Bloomberg Intelligence analysts Jason Liao and Marvin Chen wrote in a note, referring to China’s onshore equities. 

Outflows from a trading link with Hong Kong that allows foreign investors access to Chinese local stocks totalled an estimated 90 billion yuan (US$13.5 billion or RM54.9 billion) in the third quarter, the biggest in a year and reversing more than half of the inflows between April and June, the note says.

The recent sell-off has also weighed on some of China’s hottest trading debuts. Memory-chip giant CXMT Corp, which went public in July, has fallen 27% from its post-listing peak. Similarly, robotics firm Yushu Technology Co, has lost around 50% from an August high shortly after its initial public offering.

Chinese companies have fetched a combined US$37 billion (RM151 billion) from onshore IPOs this year, lifting annual proceeds to their highest in three years, according to data compiled by Bloomberg. Tech firms accounted for over a third of the funds raised.

The underperformance of China’s tech stocks poses a challenge for authorities that are keen to use capital markets to fuel the firms’ growth. The country’s AI-linked national champions and startups have shown a stronger preference for equity financing over debt, partly reflecting the higher costs for them to issue bonds globally. 

Equities are “the default source” of funding for China’s AI firms, according to Mironov. “If the slump is prolonged it will have an impact and Beijing may need to be more proactive in expediting financial sector reforms and potentially deploying the national team more aggressively,” he said, referring to a group of state-backed funds used by regulators to stabilise markets.

To be sure, the tide may shift if the government significantly increases efforts to prop up the languishing market. Financial regulators held a meeting Thursday to discuss stabilisation measures and called on the national team to accelerate stock purchases. Any pleasant surprises from the upcoming third-quarter earnings season may also help brighten the mood. 

Still, some investors are sceptical about the outlook because China’s AI-related stocks remain expensive even after the recent sell-off. The Star50 now trades at over 40 times forward earnings. It compares with less than five times for South Korea’s Kospi Index and 21 times for the Nasdaq 100.

“Current levels represent a technical pullback, not a value play,” said Jian Shi Cortesi, a fund manager at Gam Investment Management. “For many high-potential tech names, big bargains won’t appear until they fall another 30%-50%.”

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