China Stock Markets Lose Trillions Amid AI Race and Weak Domestic Demand

Trillions of dollars have been wiped from China's stock markets in recent months due to growing anxiety over the artificial intelligence sector and its race for dominance with the United States. The STAR 50 Index on the Shanghai stock exchange has dropped 40% since June, while other major indexes fell by about 20%. This sharp decline has erased $2.4tn from the market since May, according to Bloomberg data.

Causes of the Drop

AI stocks make up over 40% of the stock market value in China and Hong Kong. The Chinese government has heavily invested in this sector, including a 60bn yuan state-backed AI investment fund that started pumping money into developers this month. However, domestic consumers remain reluctant to spend, leaving many technology companies struggling to make a profit. Additional pressures include western trade threats, such as US bans on Chinese humanoid robots and potential restrictions on data centre components, alongside rising US interest rates. Shares in Unitree, a top Chinese robot-maker, have halved since trading began in August.

Political Timing

Top officials in the Chinese Communist party are gathering for the fifth plenum to prepare for next year's 21st Party Congress, where China's leader, Xi Jinping, is expected to secure a fourth term. Because of this sensitive political timing, policymakers are avoiding risky stimulus measures that could destabilise the economy. Despite the current struggles, optimism remains in other sectors like satellites and AI research, driven by strong military links and long-term state backing.

Context

Stock market drops of this scale reflect a clash between heavy state-led industrial planning and cautious consumer spending in a slowing economy. When governments pour vast sums into new technologies like artificial intelligence without matching domestic demand, companies often struggle to turn early hype into steady financial returns.