China's AI bull market has ended in a bust. The STAR50 closed at 1,252.28 on 27 October, a seven-month low and 44% below its intraday peak on 1 July. From the 30 June close of 2,207.87 the fall is 41.9%, and about $480 billion of market value has gone, according to Reuters. The index bounced 2.45% to 1,282.93 on Wednesday.
Strictly speaking, the STAR50 is not a pure AI index: it tracks the 50 largest and most liquid stocks on Shanghai's STAR Market, where information technology is 86.6% of the weight. But chips define it: Cambricon is 9.75%, SMIC 7.5%.
Fig. 1. STAR50: a 64% rally and a 42% crash from the peak. Data: Sina Finance.
Fig. 2. Valuation and concentration: why the drop was deep. Data: Reuters, Goldman Sachs.
Strictly speaking, the STAR50 is not a pure AI index: it tracks the 50 largest and most liquid stocks on Shanghai's STAR Market, where information technology is 86.6% of the weight. But chips define it: Cambricon is 9.75%, SMIC 7.5%.
Fig. 1. STAR50: a 64% rally and a 42% crash from the peak. Data: Sina Finance.
Why the bubble burst
The forces fed on each other.- Valuation. At the peak the index traded at about 250 times trailing earnings; it is near 100, against 30 for the Nasdaq 100.
- Leverage. In January exchanges raised the margin requirement to 100% from 80%, and regulators began pushing high-frequency servers off exchange premises. Margin balances fell by more than 170 billion yuan in under a month.
- Supply. Alibaba's HK$80 billion placement, Yangtze Memory's IPO application and Unitree's listing added paper.
- External shock. In August Washington said it was drafting a ban on Chinese data-center equipment. Zhongji Innolight and Eoptolink are down about 60% from summer highs.
Fig. 2. Valuation and concentration: why the drop was deep. Data: Reuters, Goldman Sachs.
Earnings up, shares down
Business is booming: Cambricon's nine-month revenue rose 106.8% to 9.53 billion yuan and profit 131.5%. But inventories jumped 136% to 11.7 billion yuan, and operating cash flow in the third quarter was negative. Investors stopped paying for the future and asked about the quality of sales.What next
Beijing helped to prick the bubble: it wants a "slow bull", not a vertical rally. State-backed funds sold into strength and now buy ETFs to stop the slide, with 46 billion yuan flowing into national-team favourites on 22 October. That is a floor, not a catalyst. Margin debt is back to late-2025 levels and turnover is near a 15-month low.
⚠ IMPORTANT
My view: this is a repricing, not the end of China's AI story. With the STAR50 near 100 times earnings, rallies will be sold. A turn needs durable cash flow, fresh money and a signal that Washington will not close export markets. None is visible yet.