China’s $2.4tn market sell-off tests Beijing’s AI strategy

By Elena Vasquez

How large is the market sell-off?

China’s stock markets have lost $2.4tn since May, according to Bloomberg, as the STAR 50 Index plunged 40% since June.

The STAR 50 tracks technology and innovation companies on the Shanghai stock exchange. Other indexes of major companies dropped about 20% over the same period, according to the report.

Goldman Sachs estimates that AI stocks account for more than 40% of stock market value in China and Hong Kong. That concentration means any dent in AI valuations can send shockwaves through the wider domestic market.

The report argued that government efforts had not overcome the domestic economy’s inability to sustain a booming market. For Beijing, the stakes extend well beyond listed technology companies.

The breadth matters. The STAR 50 decline came alongside roughly 20% drops in broader indexes, not just a retreat from one business. The report tied both moves to anxiety about AI’s future and China’s ability to compete with the US.

The government wants a domestic AI industry while competing with the US. Public markets are now testing whether state support can produce a durable profit engine, rather than simply finance product development.

Why are investors pulling back?

The Chinese government has invested heavily in AI. That effort includes a 60bn yuan state-backed AI investment fund, which began pumping money into domestic developers this month.

Yet consumers have remained reluctant to spend across much of the economy, including technology. That reluctance has left many tech companies struggling to turn a profit.

The report identified three forces behind the sell-off:

• Profit margins have fallen short of expectations, according to Dan Wang, China director for the Eurasia Group.
• Western countries, especially the US, threaten to extend bans on Chinese technology.
• US rate rises and weak Chinese domestic demand are weighing on technology companies.

“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,” said Dan Wang, China director for the Eurasia Group.

She described a “general anxiety” among technology companies about whether the state-backed model would work in the face of weak consumer demand. The question is whether government and research money can create useful products when ordinary customers remain reluctant to pay.

The investment fund therefore faces the market’s hardest test. State support can fund development, but the report says weak spending leaves many companies short of sustainable profit.

Can export restrictions tighten further?

The US has banned humanoid robots from China, citing national security risks. It is also thought to be considering a ban on Chinese components in data centres.

This sits within a broader threat of Western countries, especially the US, extending restrictions on Chinese technology. The report counted that risk among the reasons for the sell-off.

China depends heavily on exports. US restrictions hurt domestic companies, which already struggle to sell enough products at home.

For Chinese technology businesses, export controls make the weak domestic market harder to absorb. Investors face a sales problem at home and a policy risk abroad, according to the report’s assessment.

Why is Beijing betting on robots?

As China races the US to lead in AI, Beijing has doubled down on robotics, also known as embodied AI. The report said robotics serves as a key to rolling the technology out across society.

Robotics also offers an answer to China’s demographic pressures. The country faces an ageing population and a shrinking workforce, problems the government wants emerging technology to help solve.

Yet demand for robotics comes from government agencies and research institutions rather than everyday consumers. Products remain too expensive and not yet practical for home use.

Humanoid robotics and robotic dogs have found popularity in the entertainment industry. They have yet to prove useful in home settings, according to the report.

Unitree, China’s leading robot maker, has seen its shares halve since the company started trading in August. The fall gives public investors a direct signal about doubts surrounding the sector.

“It doesn’t look like embodied intelligence could turn into profits in the in the mass market,” said Wang.

She tied that assessment to thin profit margins, rising rates in the US and weak domestic demand. Those pressures were feeding the same “general anxiety” among technology companies, she said.

Will domestic capital return?

The Chinese government wants local investors to put their money into domestic markets. In recent months, it has restricted overseas investment, with more regulations taking effect from 1 December.

Those moves have not produced greater investment in Chinese markets, according to the report. The government’s effort to redirect capital has yet to generate the activity it seeks.

The report still identified pockets of optimism in other technology sectors, including AI research and satellites. Satellites have military links, which indicate long-term state support for the sector.

Globally, the AI boom is expected to last for at least another year. That backdrop leaves room for investors to distinguish between short-term losses and a deeper retreat from Chinese technology.

How does Anthropic’s IPO compare?

On Monday, US AI company Anthropic filed paperwork ahead of a planned IPO. The company makes the chatbot Claude, and its debut could become the biggest stock market debut of all time.

Anthropic is expected to raise as much as $100bn. China has no such blockbuster IPOs on the horizon.

Policymakers face pressure to introduce stimulus and boost investment. None are expected during a politically sensitive period in China, according to the report.

This week, top officials in the Chinese Communist Party are gathering for the fifth plenum. The meeting will lay the groundwork for next year’s 21st Party Congress, which is expected to anoint Xi Jinping, China’s leader, with a fourth term.

The report said there was no appetite for risky or potentially destabilising policy measures before then, even if such measures could boost the economy. Wang called any stimulus measure “high risk”.

Wang said: “What if it doesn’t work out? Then whoever came up with that policy, that guy would be held accountable.”

What will Beijing decide next?

The next market test is whether state-backed AI, embodied AI and robotics can reach paying customers beyond government agencies and research institutions. The 60bn yuan fund has started funding developers, but the sell-off shows that capital alone has not settled the profit question.

The fifth plenum will set the political direction before next year’s Party Congress. With no stimulus expected during the sensitive period, the next signal will come from whether Beijing can turn public support into commercial returns without stronger consumer demand.