Chinese markets lose trillions as race for AI supremacy with US takes its toll

China’s stock-market losses are unusually large. Bloomberg estimates that $2.4tn in market value disappeared between May and the period covered by the article. The fall shows how quickly investor confidence can weaken when worries about profits, demand, interest rates, and trade restrictions combine.

Technology shares led the decline. The STAR 50 Index, which tracks technology and innovation companies in Shanghai, plunged 40% since June. Other indexes of major Chinese companies fell by about 20% over the same period. Because AI-related companies make up a large share of the market, their losses affected much more than a narrow technology corner.

The decline also challenges Beijing’s technology strategy. The government has invested heavily in AI and launched a 60bn yuan state-backed fund, but investors still question whether companies can earn sustainable profits. Weak household spending, possible US restrictions, and the absence of major Chinese technology IPOs have added to the pressure.

The STAR 50 Index is a stock-market index on the Shanghai stock exchange. It tracks 50 technology and innovation companies. An index groups selected shares into one measure, so investors can see how that part of the market is performing without examining every company separately.

Its sharp decline makes the index especially important in this story. The STAR 50 fell 40% since June, far more than the roughly 20% fall in other indexes of major Chinese companies. That gap shows that investors have been particularly worried about technology and innovation businesses, including companies linked to artificial intelligence.

The index does not measure China’s entire economy. However, it reflects confidence in an important sector that Beijing is actively supporting. Since AI stocks account for over 40% of stock-market value in China and Hong Kong, technology weakness can spread through the wider market and undermine confidence in government-backed growth plans.

A fall in AI shares can shake China’s wider stock market because AI companies occupy such a large portion of total market value. Goldman Sachs estimates that AI stocks account for over 40% of stock-market value in China and Hong Kong. When those shares lose value, the decline directly pulls down broader market measures.

The mechanism is simple. A market index reflects the combined value of many companies, with larger companies usually having a bigger effect. If highly valued AI companies fall sharply, the overall market loses value even when unrelated businesses do not change as much. Investors may also become more cautious about other technology companies.

The shock is financial and psychological. The article links the sell-off to weak profits, soft domestic demand, higher US rates, and possible American restrictions. Together, these concerns make investors question whether China’s state-backed AI strategy can support lasting growth.

Beijing has invested heavily in artificial intelligence, but investment alone does not create a profitable business. Chinese consumers have remained reluctant to spend in many parts of the economy, including technology. That leaves companies struggling to sell enough products and turn revenue into profits.

A 60bn yuan state-backed AI fund began investing in domestic developers, showing strong official support. Yet investors are judging companies by expected earnings, not only by the money flowing into the sector. Robotics offers a clear example: government agencies and research institutions are buying products, while ordinary households find them too expensive and impractical.

Foreign pressure adds another risk. The United States has banned humanoid robots from China and may restrict Chinese components in data centres. China’s reliance on exports means overseas limits can worsen weak home demand. These pressures have created anxiety about whether the state-backed model can produce durable profits.

Chinese technology companies depend on both sales and investor confidence. Weak domestic demand means fewer consumers and businesses buy their products. Lower sales can produce thinner profit margins, which makes investors less willing to pay high prices for their shares.

Higher US interest rates add financial pressure. The article links rising rates with the sell-off, although it does not detail every transmission channel. In general, higher rates can make investments outside the United States less attractive and increase concern about companies that need future growth to justify current valuations. Investors then reduce the prices they are willing to pay.

American technology restrictions threaten the other side of the business: overseas sales and supply chains. The US has banned Chinese humanoid robots and may restrict Chinese components in data centres. Since China relies heavily on exports, these barriers can cut potential revenue while weak domestic demand leaves companies with fewer alternatives.

Beijing is promoting robotics, also called embodied AI, as a way to spread artificial intelligence through society. The technology is also presented as an answer to demographic pressures, including China’s ageing population and shrinking workforce. Robots could potentially perform tasks as fewer working-age people are available.

The market has not yet matched that ambition. Government agencies and research institutions are driving demand, rather than everyday consumers. Humanoid robots and robotic dogs have attracted attention in entertainment, but the article says they are not yet useful in home settings. Unitree, described as China’s leading robot-maker, saw its shares halve after trading began in August.

The central problem is commercial. Household products remain too expensive and insufficiently practical, so mass-market sales are limited. That makes profits uncertain. The article says AI research and satellites still inspire optimism, while embodied intelligence has not yet shown that it can generate strong mass-market returns.

When trillions are “wiped out,” the combined market value of listed shares has fallen by that amount. It does not necessarily mean companies lost the same amount of cash from their bank accounts. A share price multiplied by the number of shares gives a company’s market value, so falling prices reduce that quoted value.

Stock prices also reflect expectations. Investors buy shares based partly on what they think companies can earn later. If weak demand, thin margins, higher US rates, or American restrictions threaten future profits, investors may sell. Lower demand for shares then pushes prices down. The article’s $2.4tn loss describes this fall in market value.

Government investment can support research and development, but it cannot ensure profitable sales. Beijing’s 60bn yuan AI fund may provide capital, while consumers still avoid expensive products. Investors therefore distinguish between money invested today and sustainable profits tomorrow. That explains why official support has not prevented the sell-off.