While global tech stocks teeter, in China they have already crashed as lofty valuations collapse amid concerns about AI demand and restrictions on Chinese exports.

The selloff has driven the mainland STAR 50 index of AI and semiconductor companies down 40 percent in less than four months, wiping out about $480 billion in market value. The slump is a warning sign for volatile global markets and a setback for China's efforts to encourage savers to invest in stocks to fund the AI boom.

It has also halted a rally that had lasted two years, since promises of economic stimulus sent shares soaring. The decline has stalled Beijing's efforts to break a longstanding boom-and-bust cycle and establish a “slow bull” market with more reliable returns. China's CSI 300 blue-chip index has fallen about 20 percent from its June peak.

“The stock market later evolved into a speculative crazy bull,” said Beijing-based fund manager Dong Baozhen. “And now we see the bubble bursting.”

China's reversal follows a rally that pushed valuations higher than those in Western markets and elsewhere in Asia. By comparison, US AI stocks have suffered a more modest setback, contributing to a 6 percent decline in the Nasdaq from a record high reached three weeks ago.

There has been no clear trigger for the Chinese selloff. Traders cited high valuations, tax bills and the threat of the United States and other countries banning Chinese equipment from data centres.

AI stocks account for 42 percent of China's market capitalisation and 57 percent of turnover across mainland-listed A-shares and Hong Kong-listed H-shares, according to Goldman Sachs. With small investors dominating the market, few have escaped the losses.

Retail favourites slide

Shares in robot-maker Unitree, whose offering was 8,000 times oversubscribed by retail investors at listing, have halved since trading began in August. Chipmaker CXMT has lost more than a quarter of its value in the past month.

Chipmakers MetaX Integrated Circuits and Moore Threads Technology, which surged 700 percent and 400 percent, respectively, on their market debuts last year, have also lost half their value since July.

Chen Wensheng, a small business owner and investor from the southern Chinese island province of Hainan, said he joined the rally because he believed the government supported companies such as Unitree, which counted state-backed funds among its investors. Chen and his friends are now nursing losses.

The frustration over the collapse of an investment theme backed by Beijing has pushed many investors towards defensive assets and could slow fundraising by technology companies.

Shares in optical component makers Zhongji Innolight and Eoptolink Technology have fallen about 60 percent from their June and July peaks, partly as Washington moves towards banning the companies from supplying US data centres.

The STAR 50 index still trades at around 100 times its past 12 months' earnings, down from a peak of nearly 250 times. Investors are comparing that valuation with the Nasdaq 100's multiple of 30 and fear the selloff could deepen.

“What's happening is now going to put a stop for many of the companies trying to get themselves listed,” said Hong Hao, managing partner and chief investment officer at Lotus Asset Management in Hong Kong.

‘All bubbles inevitably burst’

The market frenzy and its fallout contrast with Beijing's efforts to improve returns and curb volatility by cracking down on leveraged trading and high-frequency trading. State-backed investors have also sold shares during rallies to restrain gains.

China's securities regulator did not immediately respond to questions sent by Reuters last week.

Regulator Chairman Wu Qing met market participants earlier this month to hear suggestions on improving capital markets, the regulator said on its website. Some investors argue that the technology-led rally has distorted the market.

“Overemphasising the ‘technology content’, that is, the weighting of tech companies by market value in major indexes, leads to a deviation, even a distortion, in capital behaviour,” said Leo Wang, partner at Beijing-based Qianchuang Capital.

“This created a severe bubble in certain sectors and a serious drain on others.”

Some investors see value in the selloff, arguing that it is neither unexpected nor detrimental to long-term market reforms that have helped improve returns, particularly income, in recent years.

Although they have been net sellers over the past three months, Asia-focused funds remain overweight on China, according to HSBC research.

Goldman Sachs included Innolight and CXMT among dozens of Chinese AI stocks on a revised recommendation list published earlier this month. BNP Paribas Securities strategist William Bratton has also said the market offers buying opportunities for cautious investors.

On the mainland, however, many investors are turning to other sectors or waiting for valuations to fall further before buying again.

“Just like all other Chinese manufacturers, (chipmakers and AI suppliers) will eventually end up in a price war,” said fund manager Wang Zhuo, partner at Shanghai Zhuozhu Investment Management.

“There's no exception. All bubbles inevitably burst.”