China's AI bubble has burst: 480 billion dollars in market value wiped out in less than four months

While investors around the world nervously watch hundreds of billions of dollars pour into artificial intelligence, China has already lived through what everyone fears. The tech bubble there didn't start to deflate - it burst.

In less than four months the STAR50 stock index, which tracks China's leading chipmakers and AI companies, fell by a full 40 percent. 480 billion dollars in market value has been wiped off the exchange, and the broader list of China's most valuable companies is around 20 percent below its June peak. "The stock market turned into wild speculation," says Dong Baozhen, an investment fund manager from Beijing. "And now we're watching that bubble burst."

Half the market in one basket

The fall is especially painful because AI-linked stocks made up a full 42 percent of the Chinese market's total value and accounted for more than half of all trading. Unlike Western exchanges, which are dominated by big pension and investment funds, in China a huge share of the market is held by small, ordinary citizens who believed the promises of a tech boom and invested their own savings.

The examples hurt. Demand for shares in robot maker Unitree at its stock market debut in August was 8,000 times greater than supply. A few months later, those shares have lost half their value. Shares in chipmaker CXMT lost more than a quarter of their value in a single month, MetaX and Moore Threads, which jumped as much as 700 percent after listing last year, have lost half since July, and Zhongji Innolight, a maker of optical components for data centres, has sunk by a full 60 percent.

"The excessive emphasis on technology has led to serious market distortions," explains Leo Wang, a partner at Beijing fund Qianchuang Capital. "A huge bubble was created in one sector, while money was completely sucked out of every other branch of the economy."

When the state is supposedly behind everything

Chen Wensheng, a small business owner from southern China, says he started buying shares convinced that the state and its funds were behind it all. Today he and his friends are just tallying their losses and moving what's left into safe bonds and gold.

That belief - that the state is behind everything and nothing can fail - is one the Balkans have already paid for dearly. In 1997 Albania learned what happens when thousands of ordinary people put all their savings into something that supposedly can't go under. The Chinese case is a different mechanism, but the psychology is familiar: when the promise is big enough, nobody asks who's actually making the money.

Is the West next?

America's tech-heavy Nasdaq has so far slipped only six percent from its recent record, and Chinese companies also had a problem of their own: US authorities are shutting the door ever tighter on Chinese hardware and preparing bans on its use in Western data centres. But many economists warn the underlying problem is the same on both sides of the world: companies are pouring enormous sums into equipment and servers, while real demand and earnings from AI products still aren't there.

The scale is visible in America too. According to documents published ahead of its stock market listing, one of the leading AI labs, Anthropic, reported a loss of 80 billion dollars, with plans to spend another trillion dollars on data centres over the next ten years. "All the chipmakers and AI equipment suppliers will eventually end up in a price war and squeezed margins," concludes Chinese fund manager Wang Zhuo. "There are no exceptions. Every stock market bubble eventually has to burst."

The question isn't whether it will burst, but who will be left empty-handed when it does - the funds that get out first, or the ordinary investor who was the last to believe?