Weak profits and U.S. technology restrictions weigh on Chinese stocks

STAR 50 falls 40% since June as AI profitability concerns grow

China’s stock market has shed $2.4tn in value since May, according to Bloomberg, as anxiety grows over the sustainability of Beijing’s race with the United States for AI dominance. The STAR 50 Index, which tracks technology and innovation companies on the Shanghai stock exchange, plunged 40% since June. Other indexes of major companies dropped about 20% over the same period.

Goldman Sachs estimates that AI stocks account for over 40% of stock-market value in China and Hong Kong. The Guardian said this concentration means any dent in AI-stock values will send shockwaves across the whole domestic market. The Guardian also assessed that the fall suggests government efforts to boost technology industries, particularly AI, have not given China’s domestic economy the power to sustain a booming market.

The Chinese government has invested heavily in AI, including through a 60bn yuan state-backed AI investment fund that started sending money to domestic developers this month. Yet Chinese consumers have remained reluctant to spend in many parts of the economy, including technology, and many technology companies are struggling to turn a profit.

The Guardian identified thin profits and the threat that Western countries, especially the U.S., might extend bans on Chinese technology as reasons for the sell-off. The U.S. has banned humanoid robots from China, citing national security risks, and is thought to be considering a ban on Chinese components in data centres. China’s heavy reliance on exports leaves domestic companies exposed to U.S. restrictions, while weak sales at home make it harder to replace lost demand.

Dan Wang, the China director for the Eurasia Group, said, “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.” She said the combination produced a “general anxiety” among technology companies about whether the state-backed model would work in the face of weak consumer demand.

As China races the United States to pull ahead in AI, Beijing has doubled down on robotics, also known as embodied AI, as the key to rolling the technology out across society. Robotics is also seen as a way to address an ageing population and a shrinking workforce.

Demand is being driven by government agencies and research institutions rather than everyday consumers, for whom the products remain too expensive and not yet practical for home use. Humanoid robotics and robotic dogs have been popular in entertainment but are not yet useful in home settings.

Shares in Unitree, described as China’s leading robot maker, have halved since the company began trading in August. Wang said it did not look as though embodied intelligence could produce profits in the mass market, with thin margins, rising U.S. rates and weak domestic demand feeding the broader anxiety.

China’s government wants local investors to invest their money domestically. The country has restricted overseas investment in recent months, with additional regulations taking effect December 1, but those moves have not led to greater investment in Chinese markets.

Wang said there was still optimism about other technology sectors, including AI research and satellites. She said satellites’ links to the military indicate long-term state support for the sector. The Guardian reported that the global AI boom is expected to last at least another year.

The IPO market offered a contrast. On Monday, U.S. AI company Anthropic, which makes the Claude chatbot, filed paperwork ahead of a planned IPO that could be the biggest stock-market debut of all time; the company is expected to bring in as much as $100bn. China has no comparable blockbuster IPOs on the horizon.

Although policymakers face pressure to introduce stimulus measures to boost investment, The Guardian reported that none are expected to be announced during China’s current politically sensitive period. Top officials in the Chinese Communist Party are gathering this week for the fifth plenum, which will lay the groundwork for next year’s 21st Party Congress. The Congress is expected to give Xi Jinping, China’s leader, a fourth term. The Guardian assessed that there was no appetite for risky or potentially destabilizing measures before then, even if such steps could boost the economy.

Wang called any stimulus measure “high risk” and said, “What if it doesn’t work out? Then whoever came up with that policy, that guy would be held accountable.”