China's AI play went from sprint to stumble. The Star50 soared roughly 75% from April to June, only to give back gains and slide close to 40% over the current half year. At its June 30 peak, the index traded at more than 80 times next 12 months' earnings, which left little margin once sentiment turned.
As investors reexamined demand and profit trajectories, China's AI hardware names were hit hardest. MetaX Integrated Circuits Shanghai Co. and Moore Threads Technology Co. each dropped by about half in this stretch. The damage widened beyond one gauge too, with the hardware-tilted ChiNext off 36%. Fresh listings struggled: memory maker CXMT Corp., public since July, is 27% below its post-listing high, while robotics firm Yushu Technology Co. is roughly 50% under an August peak shortly after its IPO.
The pullback did not happen in a vacuum. Bloomberg Intelligence analysts Jason Liao and Marvin Chen said a global selloff in AI hardware across the Nasdaq and Korea weighed most on China's onshore shares after foreign buyers crowded in during the second quarter.
The slide clashes with Beijing's plan to harness equities to accelerate tech leadership. Onshore IPOs have raised a combined $37 billion this year, the most in three years, with tech issuers bringing in over one third of that total. Fundraising matters because many of China's AI-linked national champions and startups favor selling stock over issuing debt, given higher global borrowing costs.
Flows flipped as prices fell. "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 of 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."
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Officials are weighing stronger support. At a Thursday meeting on stabilization measures, financial regulators called on the national team to buy shares more aggressively. Mironov added that if the downturn drags on, Beijing may need to move faster on financial sector reforms and consider deploying the national team more forcefully.
Even after the drop, valuations remain rich. The Star50 trades above 40 times forward earnings. For context, South Korea's Kospi is under five times, while the Nasdaq 100 is at 21 times. Fund manager Jian Shi Cortesi called today's levels "a technical pullback, not a value play," and said, "For many high-potential tech names, big bargains won't appear until they fall another 30%-50%."
Earnings could shift the tone. Upside surprises in the upcoming third quarter reporting season might lift sentiment, while disappointments would tighten the funding vise. Watch foreign flows too. After a rush of second quarter buying, the sharp third quarter reversal left A-shares most exposed, matching the outflow data.
China wanted buoyant equity markets to bankroll AI expansion, and many companies leaned on issuing stock to do it. The rally stretched valuations, then momentum snapped. Now the trio to watch is clear: sentiment, earnings, and policy support. With the Star50 still priced for perfection and peers like the Kospi far cheaper, the risk profile across markets is not the same.
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