China’s AI hardware stocks just went through their worst quarter in recent memory.
The STAR 50 Index fell 30.70% in the third quarter, while the ChiNext Index dropped 27.80%. Both posted their biggest quarterly declines on record. The selloff came even as profits kept rising. Net profit for companies on the STAR Market jumped 437.6% in the first half from a year earlier, and that six-month total already exceeded the full-year figure from last year.
A sharp reversal after a strong first half
The contrast is stark when placed on a timeline. In the first half, the STAR 50 gained 64.25% and the ChiNext Index rose 35.58%, while the Shanghai Composite added only 3.16%. On June 30, AI chip designer Cambricon saw its market capitalization top 1 trillion yuan, becoming the first STAR Market-listed company to reach that level.
Then came July. The STAR 50 plunged 25.90% for the month, its biggest monthly drop on record. The ChiNext Index fell 23%, and the Shenzhen Component Index lost 16.21%, both marking their steepest monthly declines since February 2016. Total A-share market capitalization shrank by about 12.4 trillion yuan from the end of June. Wind data showed the electronics sector fell 34.72% in July before rebounding 12.42% in August.
The decline returned in September. The STAR 50 fell another 9.17% for the month and closed at 1530.01 on Sept. 30, down 2.51% on the day and slipping below its 250-day moving average again after more than half a month. Bloomberg described it as the worst quarter for Chinese technology hardware stocks. The damage was deeper at the company level. Memory module maker Biwin Storage and Chinese GPU designer Moore Threads were among the biggest decliners in the AI-related group, each down at least 40%.
The market changed what it wanted to pay for
CEIBS Fund told Chinese media outlet Yicai that the core shift in A-shares during the third quarter was a move from “valuation expansion” to “earnings verification.” In simple terms, valuation expansion means stock prices rise faster than profits because investors are willing to pay more for the same amount of earnings. Earnings verification is the opposite. Investors stop paying for the story alone and start looking at what the income statement actually shows.
What makes the selloff unusual is that earnings were not weak. The Shanghai Stock Exchange said STAR Market companies posted 144.887 billion yuan in net profit in the first half, up 437.6% year over year and already above the full-year total for last year. Data from China’s National Bureau of Statistics was also strong: profits in the electronics industry rose 1.1 times in the January-August period, contributing 62.0% of profit growth among industrial enterprises above designated size.
The issue, according to the report, was timing. Those figures describe the past. What the market priced in during the third quarter was whether the next set of earnings could stay just as strong. CEIBS Fund said there is still no sufficient evidence that the AI industry is weakening, but valuations are already elevated and third-quarter earnings will need to absorb that premium.
Higher rates and U.S. restrictions added pressure
The external backdrop did not help. CEIBS Fund said Federal Reserve rate hikes and a U.S. 10-year Treasury yield above 5% made high-valuation growth stocks more sensitive to interest rates. As rates rise, profits expected further out in time are worth less in present-value terms.
Another source of pressure came from Washington. Reuters reported on Aug. 5 that the Trump administration was drafting a ban that would block imports into the United States of new models of Chinese-made optical transceiver modules, the components used in data centers for high-speed data transmission. After that report, shares of optical module maker Zhongji Innolight fell about 8% in early trading in both the A-share and Hong Kong markets. The company got 62% of its first-quarter revenue from the United States.
Same selloff, different outcome in the U.S.
On the U.S. side, the story looked different. In an earnings release, Micron projected revenue of about $61.5 billion for its fiscal first quarter of 2027 ending in November, above the analyst average estimate of $56.8 billion. Chief Executive Officer Sanjay Mehrotra said in the release, “Micron delivered record fiscal 2026 results, and we expect fiscal 2027 to be even stronger.” Micron shares have already rebounded from the summer selloff.
A research note from Guojin Securities said Chinese hardware assets lagged in this rebound not only because of positioning, but also because global capital has shown a broader preference under a strong dollar and high-rate environment, with money flowing back to the United States.
Capital rotation inside A-shares was visible
The shift could also be seen within China’s domestic market. Bank stocks moved higher in September even as technology shares fell. Industrial and Commercial Bank of China, China Construction Bank, Bank of China and four other banks hit record highs during the month.
By the end of the third quarter, the total market value of electronics stocks stood at 23.04 trillion yuan, down 4.33 trillion yuan from the second quarter. Financials added 1.43 trillion yuan to reach 16.42 trillion yuan. Harvest Fund said the market is not short of capital. What it lacks is stable earnings visibility.
Not a full collapse, but a split inside the sector
The quarter was brutal, but it was not a complete wipeout. The STAR 50 was still up 13.82% for the first three quarters combined.
The largest company in the A-share market also changed. Memory chip maker CXMT reached a market capitalization of 3.72 trillion yuan, overtaking Industrial and Commercial Bank of China at 2.81 trillion yuan. Wei Fengchun, chief economist at Chuangjin Hexin Fund, told Yicai that the AI industry has entered a new stage defined by divergence, and that the fourth quarter will be the period when the market distinguishes between real growth and false growth.
When prices were rising, investors were buying the narrative. Once prices fell, the market started checking the numbers.