Analysts believe the AI bubble in China has already burst

China AI bubble has already burst, Reuters reports. The mainland STAR50 index, which includes leading AI and semiconductor companies, has fallen 40% in less than four months.

Market capitalization has dropped by roughly $480 billion in that time. Beijing fund manager Dong Baozhen described the situation like this.

The stock market has turned into a crazy speculative 'bull.' And now we are watching the bubble burst.

The scale of the drop comes down to market concentration. According to Goldman Sachs, AI companies account for 42% of market capitalization and 57% of trading turnover. That holds true for both A-shares on the mainland and H-shares in Hong Kong.

Wang Zhuo, a partner at Shanghai Zhuozhu Investment Management, believes a price war is coming for the industry.

Like all other Chinese manufacturers, chip and AI companies will eventually face a price war. There will be no exceptions. Any "bubble" inevitably bursts.

Companies are entering a "danger zone" because of massive AI spending. The Wall Street Journal wrote back in August that if productivity growth falls short of such investments, AI could turn out to be a bubble.

In October, Ray Dalio, founder of the largest US hedge fund Bridgewater, called AI a "classic bubble" that is close to popping.

We are in the part of the cycle that precedes the bursting of the bubble, but is getting close to it. I think we are close to it.

Dalio named rising interest rates and the need to convert wealth into cash among the reasons. According to him, asset holders have billions, but can only spend them after selling those assets.

Everyone says: I have a billion dollars, but okay, try spending it. To spend that money, you need to sell wealth and get cash, which is why a bubble usually bursts.

Analysts expect the fallout to affect the global AI market.