Chinese tech stocks drop as AI profit questions mount

Investors are pulling back from Chinese technology stocks as doubts grow over whether artificial intelligence spending will generate enough profit to justify high prices. The STAR 50 Index, which tracks major firms on Shanghai’s tech-focused STAR Market, has dropped more than 40% since reaching its peak in July. The index includes leading companies in semiconductors and AI.

The decline began as profit-taking after a strong rally but has evolved into a deeper scrutiny of earnings. Benjamin Cavender of China Market Research Group said the market is now critically examining if company profits can support the excitement around AI. The initial rally accelerated in early 2025 after the emergence of DeepSeek, which fueled optimism that domestic firms could rival U.S. counterparts.

That optimism has faded as investors question how quickly heavy AI expenditures translate into bottom-line results. Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, noted that several AI initial public offerings saw strong initial demand before enthusiasm waned. He emphasized that investors want to see how tech giants turn their AI spending into tangible earnings.

The pressure is visible in major companies like CATL, a battery giant considered a key success story in China’s tech sector. CATL shares have fallen 37% since the start of the year. In the third quarter, the company reported revenue growth of roughly 59%, but net profit increased by only about 15%. Cavender described this as a gap between growth and profitability, noting that competition and tax changes are squeezing margins.

Broader economic factors are also weighing on the sector. China’s prolonged property downturn has hurt household confidence, while weak consumption affects advertising and e-commerce businesses. Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investments could pressure near-term earnings. He added that while valuations have reached multi-year lows, which may limit downside, upside catalysts remain elusive.

Some strategists see potential opportunities despite the sell-off. Brendan Ahern, chief investment officer at KraneShares, noted that STAR Board companies are benefiting from semiconductor spending by both Chinese and American tech giants. Jason Hsu, chairman of Rayliant Global Advisors, suggested that a recovery in U.S. tech stocks could support Chinese equities. However, Cavender stated that a sustained rebound requires stabilizing earnings, clearer returns on AI spending, and stronger domestic demand.