analysis East Asia<\/p>\n
Has China\u2019s AI bubble burst? What this means for the global tech\nboom<\/p>\n
While the downturn has raised concerns over valuations and\nprofitability, analysts say it does not necessarily spell trouble for\nChina\u2019s broader AI ambitions and the global market.<\/p>\n
BEIJING: Has China\u2019s artificial intelligence bubble finally burst? A\nonce-soaring rally in Chinese AI stocks has lost much of its momentum,\nwith a sharp sell-off raising questions about whether enthusiasm for the\ntechnology has pushed share prices beyond what companies\u2019 earnings could\njustify.<\/p>\n
But while the decline has fuelled debate over whether an AI\ninvestment bubble is deflating, analysts told CNA that falling share\nprices do not necessarily signal a setback for China\u2019s broader AI\nambitions - or suggest that other markets are headed for a similar\ncorrection.<\/p>\n
As of Thursday (Oct 29), China\u2019s STAR 50 Index, which tracks 50 major\ntech and innovation companies on the Shanghai Stock Exchange, had fallen\nmore than 40 per cent over four months, wiping out some US$480 billion\nin market value.<\/p>\n
The scale of the decline has brought renewed scrutiny as to whether\nheavy spending on AI can translate into higher profits, and what the\nreversal means for China\u2019s tech ambitions and the wider global AI\ninvestment boom.<\/p>\n
\u201cThe sell-off appears to be primarily a repricing of expectations,\nbut it is also prompting more scrutiny of monetisation, profitability\nand capital efficiency,\u201d said Stephen Wong, an executive committee\nmember of the Greater China Chapter of the Chartered Alternative\nInvestment Analyst (CAIA) Association, a US-based global professional\nbody for the alternative investment industry.<\/p>\n
While falling share prices could make it harder for some Chinese\nfirms to raise funds, the downturn is unlikely to derail Beijing\u2019s\nbroader AI ambitions, analysts said - which continue to benefit from\ngovernment support.<\/p>\n
WHY CHINA\u2019S AI STOCK RALLY IS LOSING STEAM<\/p>\n
The sell-off follows a roughly two-year rally in Chinese equities,\nfuelled in part by enthusiasm for AI that sent technology shares\nsoaring, particularly in sectors such as semiconductors and\nrobotics.<\/p>\n
Despite the steep correction, valuations remain elevated.<\/p>\n
As of Oct 26, the STAR 50 was still trading at around 100 times the\ncombined earnings of its constituent companies over the past 12 months -\ndown from a peak of nearly 250 times, according to Reuters.<\/p>\n
That suggests that investors are still paying a substantial premium\nfor future growth - leaving shares vulnerable if earnings fail to meet\nexpectations.<\/p>\n
Kelvin Wong, senior market analyst at online trading platform OANDA,\nsaid Chinese equities have been particularly exposed to a reversal in\ninvestor sentiment.<\/p>\n
Citing Goldman Sachs figures, Wong noted that AI-related stocks\naccounted for about 42 per cent of market capitalisation and 57 per cent\nof trading activity across mainland-listed A shares and Hong Kong-listed\nH shares.<\/p>\n
\u201cThat level of concentration leaves the market particularly\nvulnerable when investors begin taking profits,\u201d he said.<\/p>\n
Beyond speculative trading, analysts also pointed to a more\nfundamental concern: whether China\u2019s AI boom can translate into\nsustainable profits.<\/p>\n
\u201cIt goes beyond the correction of excessive valuation,\u201d said Gary Ng,\nsenior economist for Asia Pacific at Natixis.<\/p>\n
\u201cInvestors are questioning whether demand can turn into higher\nprofits, especially as capex continues to climb,\u201d he said, referring to\ncapital expenditure, or spending on equipment and infrastructure.<\/p>\n
OANDA\u2019s Wong pointed to intense competition among Chinese tech\ncompanies and firms - warning that aggressive pricing could squeeze\nprofit margins even as demand for AI computing capacity grows.<\/p>\n
Geopolitical uncertainty has also added to the pressure, analysts\nsaid - with Chinese suppliers facing the prospect of US restrictions on\ntheir equipment being used in American data centres, which could\npotentially limit access to overseas customers.<\/p>\n
Christopher Beddor, deputy China research director at research firm\nGavekal Dragonomics, said that the downturn was part of a wider regional\nsell-off and a recent drain of market liquidity.<\/p>\n
\u201cThere are also real concerns about the earnings prospects for some\nof China\u2019s AI companies as they struggle to monetise open-weight\nmodels,\u201d he said, referring to AI models whose underlying parameters are\npublicly available for others to use and adapt.<\/p>\n
THE REAL TEST FOR CHINA\u2019S AI AMBITIONS<\/p>\n
Despite the sharp decline, analysts cautioned against mistaking a\nstock market downturn for a broader setback to China\u2019s AI ambitions.<\/p>\n
The more immediate risk, they said, is whether weaker investor\nconfidence could make it harder for Chinese technology firms to raise\ncapital - particularly those with high spending and limited\nrevenues.<\/p>\n
\u201cIt will make fundraising harder in terms of valuation and delay,\nespecially for firms that are burning cash without immediate revenue,\u201d\nsaid Ng from Natixis.<\/p>\n
But he added that strategically important firms would likely continue\nto benefit from substantial state support, leaving smaller players more\nvulnerable to the downturn.<\/p>\n
Wong from the CAIA Association said the correction could also make\ninvestors more selective, potentially slowing some projects and\nencouraging consolidation among companies with weaker business\nmodels.<\/p>\n
China\u2019s AI industry could still draw on government-backed funds, bank\nlending, corporate bonds and private investment, Wong said - reducing\nits dependence on stock market fundraising.<\/p>\n
\u201cThe key distinction is between supporting the development of an\nindustry and generating an attractive return for every investor,\u201d he\nadded.<\/p>\n
\u201cGovernment support can facilitate infrastructure, research and\ncapacity building, but it cannot by itself ensure that every company\ndevelops a sustainable business model or that every security represents\ngood value.\u201d<\/p>\n
The impact on financing could become apparent over the next quarter\nor two, said Beddor from Gavekal Dragonomics - who expects the downturn\nto dampen stock market listings.<\/p>\n
But for China\u2019s longer-term AI ambitions, Beddor pointed to a bigger\nhurdle: access to advanced chips.<\/p>\n
\u201cThe real constraint on China\u2019s AI ambitions is not financing but\naccess to chips,\u201d he said.<\/p>\n
US export controls have restricted Chinese firms\u2019 access to some of\nthe most sophisticated foreign-made AI processors, which are crucial for\ntraining and running increasingly powerful AI models.<\/p>\n
While Beijing has stepped up efforts to develop homegrown\nalternatives, Chinese chipmakers still face challenges in producing\nadvanced AI processors in sufficient quantities to meet demand.<\/p>\n
COULD THE AI SELL-OFF SPREAD?<\/p>\n
China\u2019s AI stock market rout has raised a question for investors\nelsewhere: Could a similar reckoning be looming, particularly in the US,\nwhere technology giants have poured billions into artificial\nintelligence?<\/p>\n
OANDA\u2019s Wong described the Chinese sell-off as an early warning of\nvaluation and financing risks, rather than a sign that global demand for\nAI was faltering.<\/p>\n
\u201cChina\u2019s experience demonstrates how quickly sentiment can reverse\nwhen investors begin questioning the earnings assumptions underpinning\nan extended rally,\u201d he said.<\/p>\n
But analysts cautioned against drawing direct parallels between the\ntwo markets.<\/p>\n
Major US technology companies like Microsoft, Alphabet, Amazon and\nMeta have established businesses generating substantial revenue and cash\nflow, Wong said - giving them a stronger financial base to support AI\ninvestment.<\/p>\n
Beddor was also more cautious about drawing parallels between the two\nmarkets.<\/p>\n
\u201cChina\u2019s stock market marches to the beat of its own drum, which is\nquite different from US markets and sometimes even the underlying\nChinese economy,\u201d he said.<\/p>\n
\u201cBut it\u2019s hard to do a clean read-across from China\u2019s stock market to\nthe future of US markets.\u201d<\/p>\n
Elsewhere in Asia, the contrasting fortunes of AI-related companies\nunderscore why the sector cannot be treated as a single investment\ncategory.<\/p>\n
In South Korea, chipmakers SK Hynix and Samsung Electronics reported\nrecord quarterly operating profits this week, buoyed by strong demand\nfor memory chips used in AI systems.<\/p>\n
For investors, the focus is increasingly on whether rising AI\nspending is matched by growth in revenue and profits.<\/p>\n
Wong from OANDA pointed to disappointing earnings forecasts from\nmajor US technology companies, tighter financing conditions and weaker\nsemiconductor demand as potential triggers for a broader reassessment of\nAI stocks.<\/p>\n
Wong from the CAIA Association said investors should also look beyond\nlisted technology shares, as expectations about AI demand are reflected\nin investments ranging from data centres and corporate bonds to private\ncredit and power infrastructure.<\/p>\n
\u201cThese exposures may react at different speeds, so apparent\ndiversification by asset class may still conceal concentration in the\nsame economic driver,\u201d he said.<\/p>\n
He also stressed that investors needed to distinguish between the\nlong-term prospects of AI and whether individual companies were worth\ntheir current valuations.<\/p>\n
\u201cIt is possible to be right about the long-term theme but wrong about\nthe security, the capital structure or the valuation.\u201d<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/has-chinas-ai-bubble-burst-what-this-means-for-the-global-tech-boom-1793271012", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }