China's artificial intelligence stock boom has been deflating for months, with the country's STAR 50 index of science and technology companies down more than 40 percent since July, according to Foreign Policy's China Brief. The decline has left the index nearly 200 points below where it began the year and arrives as U.S. tech stocks weather their own AI overvaluation worries.
The wider Shanghai stock exchange has also drifted down this year, but tech shares rose significantly until the summer before seeing a larger decline. The newsletter's author, James Palmer, writes that no single clear reason for the drop is easy to pinpoint.
Palmer argues that the highest-quality U.S. AI models have widened the gap with their Chinese counterparts this year, even though standard AI performance indexes still put Chinese models roughly six to eight months behind, with the gap largely unchanged. He also points to the rising compute demands of high-end AI, which strain Chinese firms that possess only a fraction of U.S. computing power. That has caused some cutbacks in AI agent services, though such cutbacks were already occurring while Chinese AI stocks were still rising in the first part of the year.
Palmer's sense is that the decline is not specific to AI but reflects a broader downturn in confidence among the small Chinese investors who make up the majority of the market, consistent with the doldrums of China's post-COVID economy. State-backed investment firms are injecting capital into the market under official instructions, but Palmer says this is unlikely to staunch the bleeding.
The correction is less painful for Chinese AI firms than for their U.S. equivalents, he argues: the stock market accounts for only 5 to 6 percent of household investments in China, and Chinese AI firms draw less private investment, with much of their backing likely coming from opaque government funding, especially since DeepSeek's rapid takeoff in early 2025.
Meanwhile, Beijing is more skeptical of AI than the Trump White House, particularly about its impact on labor. Recent official comments confirm the government wants more balanced investment, Palmer writes, and AI firms may struggle to gain traction with the Chinese leadership if they are not delivering for the whole economy.
A coming test of Chinese economic sentiment is “Double 11” day on Nov. 11, the e-commerce shopping event. Online spending on goods is up 4.3 percent so far this year, respectable but far from the double-digit growth of the pre-COVID years, and a weak season would point to another search for ways to revive the economy in 2027.
Analysis
Why This Matters
- The slide in Chinese AI stocks signals cooling market enthusiasm for AI in a country that drove a sector boom through early 2025, on top of a broader market-confidence problem that state-backed buying has not fixed.
- Beijing's skepticism about AI's impact on jobs could redirect state support toward AI that serves the wider economy, changing incentives for Chinese AI firms.
- Weak "Double 11" sales would be an early signal that consumer confidence remains battered heading into 2027.
Background
China's AI sector rose rapidly in the first part of 2025, powered in part by DeepSeek's breakout and by opaque government funding rather than private investment. The stock market plays a much smaller role in the Chinese economy than in the United States, limiting the spillover damage from the selloff. The government has been struggling to revive post-COVID economic momentum.
Key Perspectives
James Palmer (Foreign Policy): says the stock decline is not specific to AI but reflects a wider downturn in confidence among small Chinese investors, consistent with the broader post-COVID economic doldrums.
The Chinese government: recent official comments indicate Beijing wants more balanced investment and is skeptical of AI's impact on labor, suggesting AI firms must show they deliver for the whole economy.
What to Watch
- Sales figures from the "Double 11" shopping event on Nov. 11 as a gauge of consumer confidence.
- Whether further injections from state-backed investment firms can stabilise the STAR 50.
- Whether Chinese AI firms adjust their strategies to align with Beijing's push for balanced, economy-wide benefits.
Checked
12 claims in this story checked against 1 source: 12 supported.
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- SupportedChina’s AI stock bubble has been deflating for months.Foreign Policy: “China’s AI market bubble has been slowly deflating for months.”
- SupportedChina’s tech stocks keep sliding.Foreign Policy: “The country’s STAR 50 index of science and technology companies is down by more than 40 percent since July”
- SupportedThe STAR 50 index is down more than 40 percent since July.Foreign Policy: “The country’s STAR 50 index of science and technology companies is down by more than 40 percent since July”
- SupportedBeijing is weighing AI’s wider economic payoff.Foreign Policy: “AI firms may find it hard to get traction with the Chinese leadership if they’re not delivering for the whole economy.”
- SupportedThe STAR 50 index is nearly 200 points below where it began the year.Foreign Policy: “leaving it nearly 200 points below where it was at the start of the year.”
- SupportedThe Shanghai stock exchange has drifted down this year, while tech companies rose significantly until summer and then saw a larger decline.Foreign Policy: “The overall Shanghai stock exchange has also drifted down this year, but tech companies saw a significant rise until the summer, followed by a larger decline.”
- SupportedPalmer says the highest-quality U.S. AI models widened their gap with Chinese counterparts this year, while standard performance indexes show the gap has largely stayed constant at six to eight months.Foreign Policy: “My own feeling is that the highest-quality U.S. AI models widened the distance with their Chinese counterparts this year, but that isn’t widely reflected in standard AI performance indexes, where the gap has largely stayed constant, falling somewhere between six to eight months”
- SupportedRising compute demands have caused some cutbacks in AI agent services, although cutbacks were already happening while Chinese AI stocks were rising earlier in the year.Foreign Policy: “That caused some cutbacks in providing services through the AI agents that are uber-popular in the country, but that was already the case when Chinese AI stocks were still rising in the first part of the year.”
- SupportedPalmer’s view is that the decline reflects broader loss of confidence among small Chinese investors, who make up most of the market, rather than an AI-specific decline.Foreign Policy: “My sense is that the stock decline isn’t specific to AI, but reflects a wider downturn in market confidence among the small Chinese investors who make up the majority of the market.”
- SupportedThe Chinese stock market accounts for 5 to 6 percent of household investments, and Chinese AI firms have less private investment than their U.S. counterparts, with backing likely coming from opaque government funding.Foreign Policy: “The stock market is much less central to the Chinese economy, accounting for just 5 percent-6 percent of household investments. And Chinese AI firms have less private investment than their U.S. counterparts; the real backing likely comes from opaque government funding”
- SupportedBeijing is more skeptical of AI than the Trump White House, especially about AI’s impact on labor, and wants more balanced investment.Foreign Policy: “the Chinese government is more skeptical—especially about AI’s impact on labor. Recent official comments confirm that Beijing wants more balanced investment.”
- SupportedDouble 11 falls on Nov. 11; online spending on goods is up 4.3 percent so far this year, and a weaker spending season points to another search for ways to revive the economy in 2027.Foreign Policy: “Nov. 11, or “Double 11” day”
