AI bubble bursts in China: STAR50 index down 40%, $480 billion erased

China's stock market boom in artificial intelligence (AI) companies has turned into a steep fall. The STAR50 index, which tracks the biggest AI and semiconductor companies listed on Shanghai's STAR Market, has dropped nearly 40% from its July 2026 peak, erasing roughly $480 billion in market value, according to market data reported on October 27, 2026. The broader CSI 300 index of blue-chip Chinese shares is down about 20% from its June peak after ten straight weekly declines, which puts it in what investors call bear market territory. State-backed investors have been buying heavily to steady the market.

A stock market bubble is when share prices rise far faster than the profits of the companies behind them, driven by excitement rather than earnings. When confidence turns, prices can fall quickly. Investors around the world have been debating whether AI shares are in a bubble. The China selloff shows what a sharp correction looks like.

The scale matters because AI and chip stocks had become the centre of China's market. If they account for more than half of all trading, as the Goldman Sachs estimates suggest, a fall in these shares drags down the whole market, as the CSI 300's bear market shows. Reports point to no single trigger. They cite stretched valuations, looming tax bills for investors and companies, and the risk of tighter export controls on advanced chips and equipment.

The intervention by China's so-called "national team", the state-linked funds that buy shares in times of stress, signals that Beijing wants to prevent a disorderly crash. Even so, analysts quoted in reports warn that the selloff may not be over, because at about 100 times past earnings the STAR50 remains expensive by global standards. Earnings multiples measure how many years of current profits an investor is paying for; a multiple of 100 means paying for a century of today's profits.

For Indian investors, the episode is a reminder of three things. First, global money moves between markets, so a sharp fall in one large market can change how foreign funds allocate money across Asia. Second, the debate about an AI bubble is not only about the US; markets that rose fastest on AI hopes are the most exposed. Third, high valuations can fall a long way even without a single bad event. This story does not offer investment advice or predict where any market goes next.

Short-term: Volatility in Chinese markets is likely to stay high while state-backed buying tries to put a floor under prices.

Long-term: The episode may cool investor appetite for AI shares priced on future promises, and could shape how companies in China and elsewhere raise money for AI projects.

Who is affected: Chinese retail and institutional investors, global funds with China exposure, AI and chip companies seeking capital, and investors elsewhere, including in India, watching for signs of a wider AI correction.

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