China's AI Push Leaves Investors Holding the Losses

China’s STAR50 index fell almost 40% in three and a half months, wiping about $480 billion from market value as investors reconsidered the prospects of artificial intelligence companies backed by Beijing’s drive for technological self-reliance. The losses land as the state tries to build domestic technology capacity and turn capital markets into a stable source of long-term funding. The promised expansion now faces a less glamorous test: can companies make profits?

The State's Bet Meets the Market

Investors bought shares in companies they saw as beneficiaries of Beijing’s effort to strengthen domestic technology capabilities and reduce reliance on imported components. Some share prices, though, had climbed beyond what earnings could justify. Government support and technological self-reliance may not sustain valuations unless companies show they can turn technology into profits.

After the sell-off, the STAR50 traded at an estimated 100 times trailing earnings, down from a high of about 250. The Nasdaq 100 traded at about 30 times earnings. The wider CSI 300 had fallen 20% from its June highs, showing concerns weren’t confined to technology shares.

Companies once rewarded for promises of rapid expansion now face closer scrutiny of profitability, customer base and competition. Investors are also weighing the cost of developing advanced technology, future AI spending, taxation and possible restrictions by foreign governments on Chinese technology products. The market’s enthusiasm for a strategic industry hasn’t answered who can pay for the expansion—or whether companies can deliver returns.

The Cost of Speculation

The sharpest reversals have hit several high-profile technology firms. MetaX Integrated Circuits and Moore Threads Technology rose approximately 700% and 400%, respectively, on their market debuts in 2025, before each lost around half its value from its July highs. Unitree’s reported retail demand exceeded the shares available at its listing by around 8,000 times; after trading began in August, its stock fell approximately 50%.

Memory-chip maker CXMT lost more than a quarter of its value in the month before the report. Optical component manufacturers Zhongji Innolight and Eoptolink Technology fell around 60% from their respective June and July peaks. Those figures show the distance between appetite for a hot listing and the harder arithmetic investors face after prices turn.

Some individual investors bought shares because they saw state investment in companies such as Unitree as a sign of confidence. Falling prices have tested that confidence, encouraged movement into more defensive assets and made new technology listings less attractive. Difficulty raising money through share sales could also limit companies’ ability to expand production, develop products or compete internationally. The losses reach beyond a chart: they may constrain the same firms the state wants to scale.

Control, Competition and Uncertain Returns

Chinese policymakers face the task of making capital markets a stable funding source for AI and semiconductor manufacturing while limiting speculation. Authorities have taken measures to restrict leveraged and high-frequency trading. State-backed funds have sometimes reduced holdings during rallies to curb rapid price increases—a tidy reminder that official support and official restraint can pull in different directions.

Goldman Sachs estimates cited in the report put AI-related stocks at about 42% of China’s market capitalization and 57% of trading volume across mainland-listed A-shares and Hong Kong-listed H-shares. U.S. authorities were close to prohibiting some Chinese optical-component manufacturers from supplying products to U.S. data centers, adding uncertainty to their sales outlook. Domestic competition could also trigger price wars, even as demand for the technology continues to rise.

Not every company tied to promising AI technology will justify its valuation. The government wants the industry to grow while curbing excessive speculation, and companies still have to demonstrate they can turn technology into profits. For investors who read state backing as a promise of rising shares, the correction has supplied a harsher answer than any policy slogan.