China tech stocks drop as investors question AI profit potential
China’s technology stocks are experiencing a sharp downturn as investors question whether the artificial intelligence boom can deliver profits strong enough to justify lofty valuations. China Daily | Via Reuters
STAR 50 Sell-Off Tests AI Earnings Justifications
The STAR Market index tracks 50 of the largest and most liquid companies on Shanghai’s technology-focused exchange, including major semiconductor and artificial intelligence firms. What started as routine profit-taking following a strong market rally has transformed into a broader reckoning over corporate earnings. Benjamin Cavender of the China Market Research Group noted that while the sell-off began as a valuation correction, markets are now taking a critical look at whether earnings can truly justify the intense AI excitement.
The initial technology rally accelerated sharply after DeepSeek emerged in early 2025, fueling widespread optimism that domestic Chinese firms could effectively challenge U.S. counterparts in the artificial intelligence sector. That optimism has since faded as investors demand clear proof of how quickly companies can translate heavy AI spending into actual bottom-line profits. Technology remains an economic bright spot, but expectations and valuations had run far ahead of market fundamentals.
Battery Giant CATL Faces Profitability Pressure
The pressure extends well beyond software and AI firms to major hardware manufacturers like CATL, long celebrated as a premier technology success story. CATL shares have fallen 37% since the start of the year. During the third quarter, the battery giant posted roughly 59% revenue growth, while net profit rose by only about 15%.
Intense competition, shifting product mixes, and alterations to taxes and rebates are squeezing profitability despite the company’s dominant global position in electric vehicles and energy storage. Cavender pointed out that CATL’s primary struggle is the widening gap between rapid growth and slower profit gains, a trend highlighting a broader challenge for Chinese technology manufacturers where expansion fails to guarantee stronger margins.
Property Downturn Weighs on Internet Platform Revenues
Beyond the tech sector, China’s prolonged property downturn continues to batter household consumer confidence, directly weighing on the advertising and e-commerce revenues of major internet platforms. Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investments could place further near-term pressure on earnings while long-term monetization prospects remain uncertain.
Ling observed that Chinese tech stock valuations have reached multi-year lows, a factor that should limit further downside even though immediate upside catalysts remain elusive. Meanwhile, Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, emphasized that investors want concrete evidence of tech giants turning spending into earnings, pointing out that several recent AI initial public offerings saw initial demand fade quickly.
Diverging Fortunes Across Domestic and Hong Kong Exchanges
Market pressures affect different segments of the market unevenly. Brendan Ahern, chief investment officer at KraneShares, highlighted that Shanghai STAR Board companies benefit directly from sustained semiconductor spending by both Chinese and American tech giants. Conversely, Hong Kong-listed stocks remain heavily exposed to sluggish domestic consumption due to their heavy weighting toward consumer-facing internet platforms.