The AI bubble has burst in the world's second-largest stock market. What triggered it?

Chinese AI stocks have already plummeted, according to Reuters. Meanwhile, in the U.S., the Nasdaq Composite Index has fallen by only 5% from the record high set on October 6, the STAR50 index—which includes leaders in the AI and semiconductor sectors in mainland China—has fallen nearly 43% from its July peak, and their combined market capitalization has shrunk by approximately $480 billion. This collapse is a warning sign for investors around the world, the agency warns.

There was almost nowhere to take shelter from the sell-off in the Chinese stock market, which is dominated by retail investors: according to Goldman Sachs, AI companies account for 42% of the market’s capitalization and 57% of trading volume in shares of local companies on the stock exchanges of mainland China and Hong Kong. Even “blue chips” were hit: their CSI 300 index has fallen by about 20% from its June highs, with nearly 9% of that decline occurring in the last month alone.

The decline was so steep in part because, prior to this, stock prices in China had soared higher than in the West and the rest of Asia, Reuters notes. “At first, the stock market turned into a frenzied speculative rally,” and now “we’re seeing the bubble burst,” the agency quotes Dong Baozhen, manager of a Beijing-based fund, as saying.

IPOs are a good indicator of the scale of the frenzy. When robotics manufacturer Unitree went public in August, demand from retail investors exceeded the number of shares allocated to them by a factor of 8,000. Shares of chipmakers MetaX Integrated Circuits and Moore Threads Technology rose 700% and 400%, respectively, on their first day of trading last year. Since July of this year, their stock prices have fallen by half, and another chipmaker, CXMT, has lost more than a quarter of its market value in the last month alone.

According to Reuters, there was no obvious trigger for the sell-off in China. The sell-off was driven by several factors at once: concerns about demand for AI and restrictions on Chinese exports, the agency reports. Traders surveyed by Reuters also point to high stock prices and the threat that the U.S. and other countries will ban the use of Chinese equipment in data centers. Washington is already preparing to shut down this market for optical component manufacturers Zhongji Innolight and Eoptolink Technology, which is partly why their stock prices have plummeted by about 60% from their summer highs, the agency notes.

Chinese companies’ access to cutting-edge AI models is also at risk: U.S. developers, including Anthropic, have called on authorities to restrict it, Bloomberg reported in September. They accused some Chinese competitors of “distillation”—that is, training their own models using American ones without permission. China called these allegations baseless. U.S. intelligence agencies suspected DeepSeek, Moonshot, MiniMax, and Z.AI, among others, of distillation, but the companies themselves remained silent at the time.

Many investors in mainland China are looking into other sectors or waiting for AI stocks to become even cheaper before they start buying them, Reuters notes. Since its May high, the Chinese stock market—the second-largest in the world—has lost $3.5 trillion, according to Bloomberg. The STAR50 P/E ratio (price-to-earnings ratio based on companies’ earnings over the past 12 months) has fallen from nearly 250 at its peak to about 100. But for the Nasdaq 100, this ratio is only 30, Reuters reports.

Chip manufacturers and suppliers to the AI industry, “like all other Chinese manufacturers, will ultimately find themselves drawn into a price war,” says fund manager Wang Zhao, a partner at Shanghai Zhuozhu Investment Management. “There are no exceptions. All bubbles inevitably burst,” he added.

This article was AI-translated and verified by a human editor