Workers work on a production line manufacturing centrally controlled navigation products for smart cars at the Beidou Intelligent Connected Vehicle Technology Co., Ltd. (BICV) factory in Suqian High-Tech Industrial Development Zone, Jiangsu Province, China, April 9, 2025.
China Daily | via Reuters
Chinese tech stocks are losing their luster as investors question whether China’s artificial intelligence boom can deliver enough returns to justify lofty valuations.
of star 50 index It has fallen more than 40% from its July peak amid growing concerns about returns on AI investments. The index tracks the 50 largest and most liquid companies in Shanghai’s technology-heavy STAR market, home to semiconductor, artificial intelligence and other high-tech companies.
Even battery giants Quatrelong considered one of China’s technology success stories, it has come under pressure and has fallen 37% since the start of the year.
What is driving the sale?
What started as profit-taking following a strong rally has turned into a broader judgment on whether profits can support current valuations.
“I think the sell-off started primarily as a valuation correction and some profit taking, but now there’s an important consideration of whether the profits justify the excitement around AI,” said Benjamin Cavender of China Market Research Group.
China’s technology rise has accelerated since the arrival of DeepSeek in early 2025, fueling optimism that domestic companies can challenge their U.S. peers in artificial intelligence.
That optimism then evaporated as investors questioned how quickly companies could turn big spending on AI into profits.
Technology remains a bright spot in the economy, but a correction is likely as expectations and valuations have outpaced fundamentals.
benjamin cavender
China Market Research Group
Tai Hui, chief market strategist for Asia-Pacific at JPMorgan Asset Management, said investors want to see how Chinese tech giants turn AI investments into returns, noting that several AI initial public offerings attracted strong initial demand before enthusiasm waned.
But the challenges extend beyond technology.
China’s long-running real estate slump has undermined household confidence, while sluggish consumption continues to weigh on the advertising and e-commerce businesses of major internet platforms.
Baysan Lin, senior equity advisor at Union Bancare Prive, warned that the long-term profitability outlook remains uncertain and increased AI investment could further pressure short-term returns.
“Valuations for Chinese tech stocks are at their lowest levels in years, and while the downside should be limited, the upside remains elusive,” he said.
CATL profitability problem?
The pressure is clear even among China’s battery champions.
CATL, a major beneficiary of the global electric vehicle and energy storage boom, posted revenue growth of approximately 59% in the third quarter, but net income increased by only approximately 15%.
Despite its dominant global position, competition, changes in product mix, and changes in taxes and rebates are putting pressure on profitability.
CATL’s problem is the gap between growth and profitability.
benjamin cavender
China Market Research Group
“The problem with CATL is the gap between growth and profitability,” Cavender said.
Lin also warned that even if CATL maintains its global leadership, declining profitability of the unit could weigh on near-term earnings.
The gap between rapid growth and slowing profit growth highlights broader challenges for China’s technology manufacturers. This means that rapid expansion does not necessarily lead to higher profit margins.
Will there be a rebound?
Not all Chinese technology stocks are facing the same pressure.
Brendan Ahern, CraneShares’ chief investment officer, said Shanghai’s STAR board companies are benefiting from semiconductor investments by Chinese and US tech giants.
On the other hand, Hong Kong-listed stocks are still vulnerable to the effects of weak domestic consumption, as they have a high proportion of consumer-oriented internet platforms.
Meanwhile, JPMorgan’s Hui said China’s real estate recession remains a fundamental obstacle, with households increasingly saving in cash rather than stocks.
Still, he said there is limited downside for Chinese benchmarks overall, citing relatively undemanding valuations and light positioning among international investors.
Some strategists even think that falling stocks may be creating an opportunity.
The biggest factor behind the decline in Chinese stocks is the decline in the U.S. market
Jason Hsu
Chairman of Rayliant Global Advisors
Jason Su, chairman and chief investment officer at Rayliant Global Advisors, said the sell-off in Chinese tech stocks has become more severe in tandem with the sell-off in U.S. stocks as investors become more skeptical about the returns on AI investments.
Therefore, a recovery in US tech stocks could support Chinese stocks.
But cheap valuations may not be enough, Cavender said, and a sustained recovery will require stable earnings, clearer returns on AI spending and stronger domestic demand.
For investors, China’s technology sector is no longer about how fast companies can grow, but whether that growth leads to sustainable profits.
