China's technology stocks are losing their luster as investors question whether the country's artificial intelligence boom can deliver profits strong enough to justify lofty valuations.
The STAR 50 Index plunged over 40% from its July peak as concerns mount over returns on AI investments. The index tracks 50 of the largest and most liquid companies on Shanghai's technology-focused STAR Market — home to semiconductor, artificial intelligence and other high-tech firms.
Even battery giant CATL , long considered one of China's technology success stories, has come under pressure, falling 37% since the start of the year.
What started as profit-taking after a strong rally has turned into a broader reckoning over whether earnings can support current valuations.
"I think the sell-off primarily started as a valuation correction and some profit taking, but now there is a critical look happening at whether earnings can justify the AI excitement," said Benjamin Cavender of China Market Research Group.
China’s technology rally accelerated after DeepSeek emerged in early 2025, fueling optimism that domestic companies could challenge U.S. counterparts in artificial intelligence.
That optimism has since faded as investors question how quickly companies can turn heavy AI spending into profits.
Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, said investors want to see how China's tech giants translate their AI spending into earnings, noting that several AI initial public offerings attracted strong initial demand before enthusiasm faded.
However, the challenge extends beyond technology.
China's prolonged property downturn has battered household confidence, while weak consumption continues to weigh on the advertising and e-commerce businesses of major internet platforms.
Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investments could further pressure near-term earnings, with longer-term monetization prospects still uncertain.
"Chinese tech stock valuations have reached multi-year lows, which should limit downside, though upside catalysts remain elusive," he said.
The pressure is also evident among China's battery champions.
CATL, a major beneficiary of the global electric-vehicle and energy-storage boom, posted roughly 59% revenue growth in the third quarter, while net profit rose only about 15%.
Competition, shifting product mix and changes to taxes and rebates are squeezing profitability despite its dominant global position.
"CATL's problem is the gap between growth and profitability," Cavender said.
Ling also warned that lower unit profitability could weigh on near-term earnings, even as CATL maintains its global leadership.
The gap between rapid growth and slower profit gains highlights a broader challenge for Chinese technology manufacturers: rapid expansion is not necessarily translating into stronger margins.
Not all Chinese technology stocks face the same pressures.
Brendan Ahern, chief investment officer at KraneShares, noted that Shanghai's STAR Board companies are benefiting from semiconductor spending by Chinese and American tech giants.
Hong Kong-listed stocks, meanwhile, remain more exposed to sluggish domestic consumption, due to their heavier weighting in consumer-facing internet platforms.
Meanwhile, JPMorgan's Hui said China's property downturn remains a fundamental obstacle, with households increasingly parking savings in cash rather than equities.
He nevertheless saw limited downside for broader Chinese benchmarks, citing relatively undemanding valuations and light positioning among international investors.
Some strategists even believe the sell-off may be creating opportunities.
Jason Hsu, chairman and chief investment officer at Rayliant Global Advisors, said the sell-off in Chinese technology stocks has deepened alongside weakness in U.S. equities, as investors grow more skeptical about returns on AI spending.
A recovery in American technology stocks could therefore provide support for Chinese equities.
But cheaper valuations alone may not be enough, according to Cavender, saying that a sustained rebound would require stabilizing earnings, clearer returns on AI spending and stronger domestic demand.
For investors, China's technology sector is no longer about how fast companies can grow, but whether that growth can turn into sustainable profits.
