Workers work on a production line making intelligent automobile central control navigation products at a factory of Beidou Intelligent Connected Vehicle Technology Co. (BICV) in the high-tech industrial development zone in Suqian, Jiangsu province, China 9 April 2025.
China Daily | Via Reuters
Chinese tech stocks are losing luster as investors question whether the country’s artificial intelligence boom can generate profits high enough to justify lofty valuations.
THE STAR Index 50 has plunged more than 40% from its July peak as concerns grow about returns on investments in AI. The index tracks 50 of the largest and most liquid companies in Shanghai’s tech-focused STAR Market, which is home to semiconductor, artificial intelligence and other high-tech companies.
Even the battery giant CATLlong considered one of China’s technological success stories, is under pressure, falling 37% since the start of the year.
What drives the sale?
What started as profit-taking after a strong rally has morphed into a broader question of whether earnings can support current valuations.
“I think the sell-off started primarily as a valuation correction and profit-taking, but there is now a critical look at whether profits can justify enthusiasm for AI,” said Benjamin Cavender of China Market Research Group.
China’s tech rally accelerated after the emergence of DeepSeek in early 2025, fueling optimism that domestic companies could compete with their U.S. counterparts in artificial intelligence.
That optimism has since faded as investors question how quickly companies can turn heavy AI spending into profits.
Technology remains a bright spot for the economy, but expectations and valuations were higher than fundamentals, so a correction was likely due.
Benjamin Cavender
China Market Research Group
Tai Hui, chief Asia-Pacific market strategist at JPMorgan Asset Management, said investors are keen to see how Chinese tech giants translate their AI spending into profits, noting that several AI IPOs generated strong initial demand before the enthusiasm faded.
But the challenge goes beyond technology.
China’s prolonged real estate slowdown has shaken household confidence, while weak consumption continues to weigh on the advertising and e-commerce businesses of major internet platforms.
Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising investment in AI could put further pressure on profits in the short term, with long-term monetization prospects remaining uncertain.
“Valuations of Chinese tech stocks have reached multi-year lows, which should limit downside risks, although upside catalysts remain elusive,” he said.
CATL’s profitability problem?
The pressure is also evident among China’s battery champions.
CATL, one of the biggest beneficiaries of the global boom in electric vehicles and energy storage, reported revenue growth of about 59% in the third quarter, while its net profit rose only about 15%.
Competition, changing product mix and changes in taxes and rebates are weighing on profitability despite its globally dominant position.
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.
Ling also warned that falling unit profitability could weigh on profits in the near term, even if CATL maintains its global leadership.
The gap between rapid growth and slower profit gains highlights a broader challenge for Chinese tech makers: Rapid expansion does not necessarily translate into stronger margins.
Is a rebound coming?
Not all Chinese tech stocks face the same pressures.
Brendan Ahern, chief investment officer at KraneShares, noted that Shanghai’s STAR Board companies benefit from semiconductor spending by Chinese and U.S. tech giants.
Stocks listed in Hong Kong, meanwhile, remain more exposed to weak domestic consumption, due to their greater weighting in consumer internet platforms.
Separately, JPMorgan’s Hui said China’s housing slowdown remains a fundamental hurdle, with households increasingly putting their savings into cash rather than stocks.
Still, he found limited downside for broader Chinese benchmarks, citing relatively undemanding valuations and light positioning among international investors.
Some strategists even believe that the liquidation could create opportunities.
The main factor behind the slowdown in Chinese stocks is the sell-off in the US market.
Jason Hsu
President, Rayliant Global Advisors
Jason Hsu, president and chief investment officer at Rayliant Global Advisors, said the sell-off in Chinese technology stocks has deepened alongside weakness in U.S. stocks, as investors become more skeptical of the returns on AI spending.
A recovery in American technology stocks could therefore provide support for Chinese stocks.
But lower valuations may not be enough, according to Cavender, saying a sustainable rebound would require stabilization of profits, clearer returns on AI spending and stronger domestic demand.
For investors, China’s technology sector is no longer dependent on how quickly companies can grow, but rather on whether that growth can translate into sustainable profits.
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