When a stock bubble bursts in a free market, investors eat the losses, the weak players fold, and the money flows somewhere smarter. When one bursts in China, the Communist Party’s banks show up with a fresh tank of helium.
A report from Reuters suggests that the AI bubble in China “has already burst.” Or it might be more apt to say that it shriveled like a rapidly deflating balloon: Over the past four months, Reuters notes, the country’s STAR50 index of AI and semiconductor companies collapsed by 40%, wiping out $480 billion in market value. That is not a typo.
“The stock market later evolved into a speculative crazy bull,” Beijing-based fund manager Dong Baozhen told Reuters. “And now we see the bubble bursting.”
Crazy bull is right. Just months ago, the STAR50 had climbed 75%. Now it’s the worst-performing major tech index on the planet. Shares of Unitree, China’s buzzy robotics company, have halved since its much-hyped IPO in August. The chipmaker CXMT has lost more than a quarter of its value in the past month. Foreign investors noticed: Net outflows through the trading link with Hong Kong hit an estimated 90 billion yuan, about $13.5 billion, in the third quarter, the biggest in a year.
So the market rendered its verdict. And Beijing promptly overruled it.
I mean, the ink on those losses had barely dried before Huawei secured a $2.3 billion loan to pour into more AI chips. Its lenders are six banks, including Bank of China, China Construction Bank, and Industrial and Commercial Bank of China.
If those names sound familiar, it’s because they’re state-owned. That isn’t the market lending Huawei money. That’s the Chinese government lending money to itself through a set of very official-looking middlemen and laughably calling it capitalism.
Then there’s DeepSeek, the startup that sent Silicon Valley into a panic attack early last year. It has raised about 100 billion yuan, roughly $15 billion, in one of the largest funding rounds in China’s history. The company set out to raise 50 billion yuan and raised its target at least twice along the way. Its top backers are CATL and Tencent. Both are private on paper, and anyone who’s been paying attention knows how far “private on paper” goes in a country where the Party can make a billionaire vanish for criticizing a regulator.
The timing is worth noting, too. DeepSeek’s round closed just two days after Washington ordered federal agencies to remove DeepSeek’s AI from their systems over security concerns. Investors heard “security risk” and reached for their checkbooks.
Here’s the thing to understand about all this: Beijing doesn’t treat AI as an industry. It treats AI as a weapon. And you don’t let a weapons program go broke just because some fund managers in Shanghai got nervous. That is the basis for what I said last month: "It’s crucial that we in the West ignore the fear-mongers and retain control of AI by being on top of the wave instead of under it."
DeepSeek’s cloud already runs on Huawei chips instead of Nvidia’s, and the company is building a data center that will hold at least 160,000 Huawei chips. That is the whole point. The goal is not to give shareholders a return. It’s to break China’s dependence on American technology, whatever the cost, and the stock market’s opinion is just noise.
That’s both China’s strength and its fatal flaw. A government that can order its banks to fund anything can keep almost anything alive at least for a while. Including things that should die. Central planners have spent a century learning this lesson the hard way, and they never seem to remember it. When you refuse to let a bubble deflate, you don’t avoid the losses. You just push them down the road and make them bigger.
Ask anyone who bought an apartment in one of China’s ghost cities how that worked out.
Now look, let's be fair about this: China isn’t the only place this movie is playing.
Reuters tied the October sell-off to a global rout, with losses hitting South Korean chipmakers, Japan’s Kioxia, American semiconductor shares, and data-center debt markets. The International Monetary Fund has warned that the consequences of an AI correction “could be global.” Even after its collapse, the STAR50 still trades at more than 40 times forward earnings, so the air may not be all the way out of it yet.
Plenty of American AI valuations rest on the same assumption: that the spending will eventually pay for itself. We’d better hope it does.
The difference is what happens when it doesn’t. If an American AI company burns through its cash and its investors walk, it fails. Somebody buys the pieces, and the market moves on, poorer but wiser. In China, the Party decides who fails, and the answer is almost never “the national champion.”
That’s the real story buried in the Reuters numbers. China’s AI bubble didn’t so much burst as get nationalized, which in the end is worse for both them and us. The market has spoken, and Beijing’s answer is the same one it always gives: The market can sit down and be quiet.
And again, China views AI as a weapon. As I've said, we need to teach it right, or watch Beijing teach it wrong.
