China tech stocks slide on profit doubts

Investors in Chinese technology equities are facing a sharp reduction in portfolio value as doubts grow over the profitability of artificial intelligence projects. The sector has entered a period of correction after a year of rapid gains, with market participants scrutinizing whether current price tags are supported by actual financial results.

The STAR 50 Index, which tracks 50 major firms on Shanghai's technology-focused exchange, has fallen more than 40% from its July high. This decline reflects a shift in sentiment following the early 2025 emergence of DeepSeek, a domestic AI model that initially fueled optimism about China's ability to compete with U.S. tech giants. That early enthusiasm has now given way to a closer examination of how quickly companies can convert heavy AI expenditures into bottom-line profits.

Benjamin Cavender of China Market Research Group described the current market move as a valuation correction that has evolved into a critical review of earnings. He noted that while initial selling was driven by profit-taking, the focus has now turned to whether financial performance can justify the excitement surrounding AI. Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, added that investors are watching how tech giants translate spending into earnings, particularly after several AI-related initial public offerings saw initial demand fade.

Pressure is also evident in the battery sector, specifically at Contemporary Amperex Technology Co. Limited, known as CATL. The company has lost 37% of its value since the start of the year. In the third quarter, CATL reported approximately 59% growth in revenue, but net profit increased by only about 15%. Cavender identified the gap between this rapid top-line growth and slower profit gains as a core issue, citing competition and changes in tax rebates as factors squeezing margins despite the company's global market position.

The broader economic environment continues to weigh on the sector. China's prolonged property downturn has weakened household confidence, while soft consumer spending has impacted the advertising and e-commerce revenue of major internet platforms. Vey-Sern Ling, a senior equity advisor at Union Bancaire Privée, warned that rising AI investment could further pressure near-term earnings. He noted that while valuations have reached multi-year lows, which may limit further downside, clear upside catalysts remain difficult to find.

Not all segments of the market are experiencing the same level of stress. Brendan Ahern, chief investment officer at KraneShares, pointed out that companies on Shanghai's STAR Board are benefiting from semiconductor spending by both Chinese and American technology firms. In contrast, stocks listed in Hong Kong remain more vulnerable to sluggish domestic consumption due to their heavier exposure to consumer-facing internet platforms.

Strategists suggest that a rebound in U.S. technology stocks could provide support for Chinese equities, as both markets have faced similar skepticism regarding AI returns. Jason Hsu, chairman of Rayliant Global Advisors, observed that the sell-off in China has deepened alongside weakness in American shares. However, Cavender argued that cheaper prices alone are insufficient for a sustained recovery, noting that stabilizing earnings and stronger domestic demand are necessary conditions.

The current market dynamic has shifted the focus for investors from the speed of company growth to the sustainability of profits. The challenge for Chinese technology manufacturers is to demonstrate that rapid expansion can be matched by stronger margins, a transition that remains central to current valuation debates.