Controversy over overheating of artificial intelligence (AI) is also growing in the Chinese stock ma..

Chinese AI-related stocks, including Cambricon, Alibaba, and Baidu, plunged significantly, with the Ke's Star 50 index falling 5.6% and the Hang Seng Tech index down 3.3%. This downturn is largely driven by concerns over overheating valuations, highlighted by SMIC's trailing PER exceeding 300, rendering it ineligible for credit collateral, and a record 2.4 trillion yuan in credit-fueled speculative investment in the broader Chinese market. Renewed U.S.-China tensions further exacerbated declines for NYSE-listed Chinese firms, though some analysts anticipate that abundant liquidity may prompt rotation into undervalued sectors, potentially mitigating a broader market collapse.

Analysis

Chinese AI-related stocks experienced a significant downturn on the 10th, with Cambricon falling 6.4%, Alibaba 4.6%, Baidu 5.7%, and SMIC 7.1%. This led to broader market weakness, as evidenced by the Ke's Star 50 index dropping 5.6% and the Hang Seng Tech index declining 3.3%. This sharp correction is primarily attributed to concerns over frothy valuations and speculative credit-fueled investment.

SMIC, which has seen a 167% year-to-date stock price increase, exemplifies these valuation concerns with a 12-month trailing price-to-earnings ratio (PER) exceeding 300, rendering it ineligible for credit collateral in China. This high multiple environment, as noted by Everdeen's Ng Xin Yao, demands exceptional performance to sustain investor confidence. Concurrently, China's stock market credit balance reached a record 2.4 trillion yuan, suggesting widespread "fear of missing out" (FOMO) among investors borrowing to acquire AI-related assets, thereby supporting a "bubble theory."

Further exacerbating the declines, renewed U.S.-China geopolitical tensions, following remarks by former President Trump, impacted NYSE-listed Chinese firms, with Alibaba falling 8.5%, Nio 10%, and Jingdong Dotcom 6.2%. Despite these headwinds, some analysts, like Hana Securities' Kim Kyung-hwan, anticipate that abundant market liquidity could prevent a deeper plunge, potentially redirecting capital towards undervalued sectors such as securities, coal, and food & beverage.

Key Decisions for Investors

• Investors should closely monitor valuation metrics, particularly PERs, for Chinese AI-related stocks given recent overheating concerns.
• Assess the leverage within their portfolios due to the record 2.4 trillion yuan credit balance and its implications for market stability.
• Factor in ongoing U.S.-China geopolitical risks which could impact market sentiment and specific company performance.
• Consider potential sector rotation into undervalued areas like securities, coal, and food & beverage as market liquidity shifts.