Not long ago, such declines seemed unlikely. Beijing has made the development of AI and semiconductors one of its economic priorities, and investors have massively bought shares of companies intended to participate in technological competition with the United States. Now the market is starting to ask a much less convenient question: how much of the promised revolution actually translates into corporate profits, and how much has already been factored into their share prices?
Chinese technology companies are losing hundreds of billions of dollars
The scale of the sale is impressive. On Tuesday, October 27, the STAR 50 lost another 4.81%, and the broad Shanghai Composite ended the session down about 1.3% to a 14-month low. A day later, however, the rebound came. On October 28, STAR 50 increased by 2.45%, ending the session at 1,282.93 points. This is an important caveat to information circulating on social media suggesting that the Chinese market is in constant decline.
Viral reports of 1.3 trillion lost in one day and 3.2 trillion in four months also require caution. The second amount, expressed in yuan, is roughly equivalent to the $480 billion reported by Reuters. The first does not have a clearly defined currency or methodology in the materials provided, so it should not be presented as an independently confirmed fact. Equally important, the decline in stock market capitalization does not mean that the same amount of cash actually flowed from the market.
The stars of China’s AI revolution lose up to 60% of their value
Companies whose prices previously rose on the wave of expectations towards artificial intelligence suffered the most. Moore Threads and MetaX, Chinese computing chip makers, have lost about half their value since July, according to Reuters. Just last year, their stock exchange debuts aroused great interest, and the shares increased by hundreds of percent in the first sessions.
Even greater declines affected manufacturers of optical components used in data centers. Shares of Zhongji Innolight and Eoptolink Technology have been up to about 60% cheaper in recent weeks than during the June and July peaks. These companies were expected to be among the main beneficiaries of the global expansion of AI infrastructure, but their prospects have been hampered by the risk of US import restrictions.
The case of Unitree, a manufacturer of humanoid robots, is particularly interesting. The company attracted so much interest from individual investors in August that the number of subscriptions for shares exceeded the available pool many times. Later, the price fell sharply, although in recent days it has started to make up for losses.
Unitree’s latest results, published on October 28, show why assessing this company is not easy. Third-quarter revenue increased nearly 70% year-on-year to 665 million yuan. At the same time, net profit fell by 17.4% to 112.7 million yuan, and research and development expenses increased by almost 250%.
This is not a picture of a company without a product or customers. Unitree is indeed expanding sales, but it is also investing huge resources in technologies whose future profitability remains difficult to estimate. It’s cases like these that show why a decline in share prices doesn’t have to mean a technology failure. It may simply mean that investors paid too early and too much for its future success.
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Why did China’s AI bubble burst?
Valuations remain one of the most serious problems. According to data cited by Reuters, the price-to-earnings ratio (P/E) of the STAR 50 index fell from almost 250 to about 100. For comparison, the Nasdaq 100 was valued at about 30 times annual earnings. Although both indexes have a different structure, the difference clearly shows how high investors’ expectations were for Chinese technology companies.
At a P/E ratio of 100, investors pay the equivalent of one hundred units of price for each unit of current annual profit. This valuation can be justified by rapid growth in future earnings, but leaves little margin for disappointment. All it takes is a weaker quarterly report, a delay in product commercialization, or an increase in financing costs for the market to sharply revise its expectations.
In addition, there is the problem of the Chinese economy. According to data released on October 19, China’s GDP grew by 4.5% year-on-year in the third quarter, but September retail sales increased by only 1.1% and fixed investment fell by 7.2% in the first nine months of the year. The expansion of the technology sector is therefore progressing in an economy that is still struggling with weak domestic demand.
The situation is further complicated by politics. The United States is considering further restrictions on Chinese components used in data centers. In September, US lawmakers introduced a bill restricting the use of selected Chinese devices in sensitive federal administration systems. The mere risk of losing part of the US market affects the valuations of AI infrastructure providers, even if the proposed restrictions have not yet gone into effect. investing.com
Could Wall Street share the fate of Chinese AI companies?
This question goes beyond China. Until recently, artificial intelligence was one of the main drivers of stock market growth in the world. Today, investors are increasingly scrutinizing whether the billions of dollars spent on processors, data centers and electricity will produce sufficient returns to justify the outlays.
This does not mean, however, that the situation in China can be automatically transferred to the United States. The US AI ecosystem includes companies with large existing revenue streams, and some infrastructure providers continue to perform very strongly. For example, South Korea’s SK Hynix reported on October 28 a more than sevenfold increase in quarterly operating profit, which helped improve sentiment on Asian stock exchanges.
On the other hand, the growing use of debt financing in AI infrastructure creates new risks. Reuters draws attention to the increasing sensitivity of this sector to capital costs and credit problems. When expected revenues do not keep pace with infrastructure spending, even companies operating in a rapidly growing market can find themselves under pressure.
The history of the Internet bubble at the turn of the century reminds us of a certain paradox. The Internet changed the world, but it did not save investors who paid absurd prices for shares of Internet companies. The technology can be a spectacular success, while the vast majority of those who invest too much in it will suffer losses. This is a scenario that cannot be ruled out also in the case of artificial intelligence.
What does this mean for Bitcoin and Polish investors?
For investors in Poland, the risk is not limited to direct ownership of Chinese shares. A possible deepening of the correction on the global technology market may also affect popular ETF funds, American stock indices and cryptocurrencies.
The most important question now is whether we are only seeing a deep correction in the most overvalued companies or the beginning of a broader change in attitudes towards investing in AI. Subsequent financial reports, infrastructure profitability, decisions of American regulators and possible interventions by Beijing will help assess how serious the problem is.
One thing is already visible: investors no longer treat the mere presence of artificial intelligence in a company’s strategy as a sufficient reason to buy its shares. And perhaps this, more than the index declines themselves, is the most important change on the technology market in recent months.
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