China’s stock market erases $2.4 trillion as AI costs outpace demand

The Chinese stock market lost $2.4 trillion in value since May, a decline driven by investor anxiety over the high costs of artificial intelligence and weak consumer spending.

The STAR 50 Index, which tracks technology and innovation firms on the Shanghai exchange, has dropped 40% since June. Broader indexes of major companies have fallen by approximately 20% over the same period. Goldman Sachs notes that AI stocks represent more than 40% of the total market value in China and Hong Kong, meaning the sector’s decline has a wide-reaching impact on the domestic economy.

Beijing has invested heavily in the sector, launching a 60 billion yuan state-backed AI fund that began funding domestic developers this month. However, consumers remain reluctant to spend, leaving many tech companies without sufficient profit to sustain their valuations. Dan Wang, the China director for the Eurasia Group, stated that profit margins this year are not as expected. She cited rising US interest rates and weak domestic demand as key factors creating a general anxiety among technology leaders.

Western trade restrictions also contribute to the selloff. The United States has banned Chinese humanoid robots on national security grounds and is considering limits on Chinese data center components. China relies heavily on exports, and these restrictions force companies to compete in a domestic market where products are often too expensive for widespread home use.

Beijing views robotics, or embodied AI, as the key to deploying technology across society and addressing demographic challenges like an aging population. Yet, demand currently comes from government agencies and research institutions rather than households. Shares in Unitree, a leading robot maker, have halved since the company began trading in August. Wang noted that embodied intelligence does not yet appear capable of generating mass-market profits.

The government has restricted overseas investment in recent months, with new regulations taking effect on December 1, to encourage local spending. These measures have not yet triggered a surge in domestic market investment. While optimism remains in sectors like AI research and satellites due to military links, the overall market faces pressure from a lack of major corporate debuts.

The timing of the decline coincides with a politically sensitive period. Top Communist Party officials are gathering this week for the fifth plenum, which will prepare for next year’s 21st Party Congress. The Congress is expected to confirm Xi Jinping for a fourth term. Wang said that introducing stimulus measures now would be high risk because the architect of the policy could be held accountable if the economy does not improve.