China’s AI Boom Has Crashed, Sending a Stark Warning to the World

China’s artificial intelligence (AI) boom is showing fresh signs of collapse. After mounting opposition from grassroots groups and technology executives seeking to curb the sector’s development, AI shares have also come under renewed pressure.

As global technology markets begin to show signs of fragility, China’s technology stocks have already suffered a sharp crash. Excessively high valuations are being squeezed by concerns over weakening AI demand and the threat of export sanctions from Western countries.

The market meltdown has cut China’s benchmark AI and semiconductor index, the STAR 50, by as much as 40% in less than four months. A staggering US$480 billion (Rp8,704 trillion) in market value has been wiped out.

The rout is a warning signal for volatile global markets, while also constraining Beijing’s ambition to encourage households to shift their savings into equities to fund the AI industry boom.

The slump has also brought to a halt a rally that had lasted for two years. Beijing’s efforts to break the cycle of extreme booms and busts and promote a stable, gradual bull market are now at risk. China’s blue-chip benchmark, the CSI 300, has fallen about 20% from its peak in June.

“The stock market eventually turned into a speculative crazy bull,” said Dong Baozhen, an investment manager at Beijing-based Qianchuang Capital, as quoted by Reuters on Tuesday (27 October 2026). “And what we are seeing now is the bursting of that bubble,” he added.

The reversal contrasts with China’s earlier rally, which had far outpaced markets in the West and elsewhere in Asia. By comparison, US AI shares have seen a modest correction, with the Nasdaq down about 6% from a record high reached three weeks ago.

There has so far been no single trigger for the massive sell-off in China. Market participants, however, point to high share prices, tax bills and the threat of restrictions by the US and other countries on the use of Chinese-made data centre equipment.

Goldman Sachs data show that AI-related shares now account for 42% of China’s total market capitalisation and 57% of trading value on the mainland’s A-share market and Hong Kong’s H-share market. As a result, almost no retail investor has escaped losses.

Retail investors’ favourites tumble

Shares in robotics maker Unitree, which was 8,000 times oversubscribed by retail investors during its initial public offering (IPO), have now fallen by half since listing in August. Meanwhile, chipmaking giant CXMT has lost more than a quarter of its value in the past month alone.

Chipmakers MetaX Integrated Circuits and Moore Threads Technology, whose shares soared by 700% and 400% respectively on their market debuts last year, have also shed about half their value since July.

Chen Wensheng, a small-business owner and investor from Hainan, said he bought shares during the rally, believing the government fully supported companies such as Unitree, which is backed by state-owned enterprise funds. Chen and his associates are now facing heavy losses.

Disappointment that an investment sector strongly backed by Beijing has ended badly has prompted many investors to move into defensive assets. This is expected to slow equity fundraising by technology companies.

Shares in optical-component makers Zhongji Innolight and Eoptolink Technology have also fallen about 60% from their June and July peaks. The drop followed Washington’s move to bar the two companies from supplying equipment for data centres in the US.

With the STAR 50’s price-to-earnings ratio still around 100 times, despite falling from a peak of nearly 250 times, investors are comparing it with the Nasdaq 100, which trades at just 30 times earnings. Market participants are therefore concerned that the sell-off may continue.

“What is happening now will certainly deter many companies planning to list,” said William Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong.

‘Every bubble eventually bursts’

The panic and its knock-on effects run counter to efforts by market authorities to improve returns and reduce volatility by clamping down on leveraged transactions and high-frequency trading. State-backed investors had even sold shares during market rises to keep prices from climbing too quickly.

China’s securities regulator, the China Securities Regulatory Commission (CSRC), did not respond to questions sent by Reuters. However, CSRC chairman Wu Qing reportedly met market participants earlier this month to hear suggestions on improving the structure of the capital market.

Some investment groups believe an excessive focus on technology has damaged the wider market structure.

“Overemphasis on ‘technology content’—the weight of technology companies in major indices by market value—has caused deviations, even distortions, in capital behaviour,” said Leo Wang, a partner at Qianchuang Capital.

“This has created severe bubbles in certain sectors and worryingly drained liquidity from others,” he added.

Nevertheless, some global investors still see opportunities in the correction. HSBC research found that funds across Asia remain significantly overweight in Chinese shares.

Goldman Sachs has also kept Innolight and CXMT on its latest list of recommended Chinese AI stocks. William Bratton, a strategist at BNP Paribas Securities, similarly said the market is offering an attractive buying opportunity for discerning investors.

On the mainland, however, most investors are looking to other sectors or waiting for valuations to fall further before buying again.

“As with other Chinese manufacturers, chipmakers and AI suppliers will eventually get caught up in a price war,” said Wang Zhuo, a partner at Shanghai Zhuozhu Investment Management. “There are no exceptions. Every bubble eventually bursts,” he stressed.