China’s stock markets have experienced significant losses in recent months amid mounting concerns over the country’s ability to compete with the United States in the race for artificial intelligence (AI) supremacy. Since June, the STAR 50 Index, which tracks technology and innovation firms listed on the Shanghai Stock Exchange, has fallen by approximately 40%, while broader indexes tracking major companies have declined by around 20%. The downturn has erased an estimated $2.4 trillion in market value from Chinese equities since May.
AI-related stocks represent more than 40% of the combined market value of companies in China and Hong Kong, making the sector a critical driver of investor sentiment. Despite substantial government efforts to advance China’s technology industries—particularly those focused on AI—the market has faltered amid weak domestic demand and profitability challenges among tech companies.
The Chinese government launched a 60 billion yuan state-backed AI investment fund earlier this month aimed at supporting local developers. However, consumer reluctance to spend on technology products has hampered the ability of many firms to generate profits, contributing to the overall market sell-off. In addition, external pressures, including expanded restrictions by the United States on Chinese technology, have intensified investor unease. The U.S. has banned the import of humanoid robots from China, citing national security concerns, and is reportedly considering further limits on Chinese components used in data centers.
Experts note that China’s domestic economy struggles to compensate for these external constraints due to its heavy reliance on exports. Dan Wang, China director at the Eurasia Group, highlighted a "general anxiety" among tech companies driven by factors such as underwhelming profit margins, rising U.S. interest rates, and weak local consumer demand. Wang also emphasized skepticism about whether China’s state-backed model for technology growth can overcome these obstacles.
China’s push into robotics, also referred to as embodied AI, is seen as a strategic response not only to the AI race but also to demographic challenges such as an aging population and shrinking workforce. However, demand for robotics is primarily concentrated among government agencies and research institutions. Consumer adoption remains limited, as robotic products, including humanoid robots and robotic dogs popular in entertainment, have yet to achieve widespread practical use in households.
One example is Unitree, a leading Chinese robotics manufacturer, whose shares have dropped by half since debuting in August. Analysts suggest that embodied AI technologies have yet to demonstrate viability for mass-market profitability.
The Chinese government has encouraged local investors to direct capital into domestic markets while simultaneously implementing restrictions on overseas investments, with new regulations coming into effect in December. Nonetheless, these measures have not yet resulted in increased investment within China’s technology sector.
Despite current market setbacks, some optimism persists in areas like AI research and satellite technology, the latter benefiting from strong links to the military and expected continued state support. Globally, the AI sector remains vibrant, exemplified by U.S.-based Anthropic’s recent filing for a potential initial public offering that could raise up to $100 billion, which would challenge record-breaking IPOs.
In contrast, China has no comparable large-scale IPO projects in the pipeline. Moreover, with senior Chinese Communist Party officials convening for the fifth plenum to prepare for next year’s 21st Party Congress—which is expected to cement Xi Jinping’s leadership for a fourth term—there is little appetite for introducing major economic stimulus measures. Officials appear cautious about undertaking risky policies that could backfire politically or economically during this sensitive period.
Wang summarized the mood in the sector, stating that while stimulus could potentially boost the economy, the risk of failure—and the corresponding political consequences for those responsible—makes policymakers reluctant to take bold actions ahead of the Party Congress.