China's AI stocks are 40% off. They still cost about 100 times earnings.

China's AI stock boom ran hotter than anything in the US. Now it has cooled faster too.

The drop. The STAR 50, the Shanghai index of AI and semiconductor leaders, has fallen about 40% in less than four months from its June high, erasing some $480 billion in market value, Reuters reported on October 26. The blue-chip CSI 300 is down about 20% from its June peak, which technically put it in a bear market last week, per the South China Morning Post. State-backed funds have stepped in to try to slow the losses, the Post reported.

Who got hit. According to Reuters:

• Robot maker Unitree, whose share offering was 8,000 times oversubscribed by retail buyers, has halved since it started trading in August.
• Chipmakers MetaX Integrated Circuits and Moore Threads Technology, which jumped 700% and 400% on their debuts last year, have both halved since July.
• Optical parts makers Zhongji Innolight and Eoptolink Technology are down roughly 60% from their June and July highs, partly as Washington moves toward banning them from supplying US data centers.
• Memory maker CXMT lost more than a quarter of its value in the past month.

Why it matters beyond China. AI stocks make up 42% of market value and 57% of trading across mainland A-shares and Hong Kong H-shares, per Goldman Sachs figures cited by Reuters, so most small investors there are exposed. Traders pointed to high prices, tax bills and the threat of bans on Chinese equipment in foreign data centers; Reuters found no single trigger.

The "sale" price. Even after the fall, the STAR 50 trades at around 100 times trailing earnings, down from a high of nearly 250, compared with about 30 times for the Nasdaq 100, Reuters said. Morgan Stanley expects onshore and offshore Chinese stocks could fall another 10% to 15% before they bottom, the SCMP reported. US AI stocks have had what Reuters called "a mere prick" by comparison: the Nasdaq is about 6% below the record high it set three weeks ago.

Our take. A 40% markdown sounds like a clearance sale until you read the price tag. At about 100 times earnings, investors are still paying for a lot of future AI profit that hasn't shown up yet. Not investment advice.