In China, the AI bubble has already burst

Reuters

China’s AI-heavy STAR50 index has collapsed 40% from its July high in under four months, erasing $480 billion in market value amid falling artificial intelligence demand and foreign export curbs. This dramatic sell-off threatens Beijing’s push to funnel retail savings into technology equities to accelerate domestic semiconductor development.

Retail enthusiasm for rapid capital gains ultimately undermined long-term market resilience. The market crash has stalled a two-year rally, disrupting government plans to foster a stable "slow bull" market. Concurrently, China’s blue-chip CSI300 index has declined roughly 20% from its June peak. Capital flight was swift. Beijing-based fund manager Dong Baozhen described the earlier surge as a speculative "crazy bull" that inevitably triggered a bubble burst. In contrast, the United States Nasdaq index has experienced a modest 6% drawdown from its record high three weeks ago, demonstrating that mainland markets faced far greater speculative vulnerability than Western tech shares during this global valuation correction.

Comment

Beijing faces an acute strategic trade-off between leveraging speculative retail equity markets to rapidly fund semiconductor independence and enforcing systemic financial stability. Relying on retail momentum through the STAR50 index generates rapid capital injection for domestic chipmakers facing American export controls under the Commerce Department, but leaves state-directed technology initiatives exposed to volatile market crashes. When retail sentiment breaks, state-backed technology firms lose vital secondary market financing just as foreign supply chains tighten.

This structural instability forces Chinese policymakers to rely more heavily on direct state vehicles like the National Integrated Circuit Industry Investment Fund rather than public capital markets. Consequently, state capital allocation increases dependency on centralised subsidies, risking the bureaucratic inefficiencies that previously delayed 28-nanometer fabrication milestones at Semiconductor Manufacturing International Corporation.

Strategic Question for Discussion

If Beijing shifts semiconductor funding away from public equity markets like the STAR50 index toward direct allocation via the National Integrated Circuit Industry Investment Fund, will centralized state financing provide greater resilience against foreign export controls or exacerbate capital inefficiency?

The trajectory indicates that relying primarily on direct state vehicles like the National Integrated Circuit Industry Investment Fund provides greater short-term resilience against retail market volatility. However, the available evidence suggests that centralizing funding within bureaucratic state channels increases the risk of misallocated capital and delayed technical benchmarks, as seen in earlier subsidy cycles. Ultimately, state-directed equity offers stability at the direct expense of market-driven operational agility.

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