Shanghai Tech Index Drops 40% As AI Profit Questions Mount

Chinese technology stocks are falling as investors question whether the country's artificial intelligence boom can produce profits high enough to support current prices. The STAR 50 Index, which tracks 50 major firms on Shanghai's technology-focused STAR Market, has declined more than 40% from its July peak. This drop reflects growing anxiety over the return on heavy AI investments.

The sell-off began as a valuation correction and profit-taking after a strong rally. That rally accelerated in early 2025 after the emergence of DeepSeek, which raised hopes that domestic firms could rival U.S. counterparts in AI. Benjamin Cavender of China Market Research Group noted that the market is now critically examining whether earnings can justify the excitement around AI. Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, added that investors want to see how big tech groups convert spending into earnings.

The pressure extends beyond pure tech plays. Battery maker CATL, a key player in the electric-vehicle sector, has lost 37% of its value since the start of the year. In the third quarter, CATL reported approximately 59% revenue growth, but net profit rose only about 15%. Cavender identified the gap between growth and profitability as the core problem for the company, citing competition and tax changes as factors eroding margins.

Broader economic conditions are also weighing on the sector. China's prolonged property downturn has dampened household confidence, while weak consumption hurts the advertising and e-commerce businesses of major internet platforms. Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investment could pressure near-term earnings. He stated that valuations have reached multi-year lows, which may limit downside, though upside catalysts remain elusive.

Market dynamics vary by sector. Brendan Ahern, chief investment officer at KraneShares, observed that companies on the STAR Board are benefiting from semiconductor spending by global tech giants. In contrast, Hong Kong-listed stocks face more pressure from sluggish domestic consumption due to their heavier exposure to consumer-facing internet platforms.

Strategists are divided on the path forward. Jason Hsu, chairman and chief investment officer at Rayliant Global Advisors, suggested that a recovery in U.S. technology shares could support Chinese stocks. Cavender cautioned that cheaper valuations alone are insufficient, noting that a lasting rebound requires stabilizing earnings and clearer returns on AI spending. The focus for investors has shifted from the speed of growth to the sustainability of profit.

The next phase of the market will depend on how companies demonstrate that their heavy AI spending translates into bottom-line results. Until then, the STAR 50 remains under pressure, with its 40% decline serving as a benchmark for the sector's current uncertainty.