China’s technology stocks are losing their luster as investors question whether the country’s artificial intelligence boom can deliver profits strong enough to justify lofty valuations.

The STAR 50 Index plunged over 40% from its July peak as concerns mount over returns on AI investments. The index tracks 50 of the largest and most liquid companies on Shanghai’s technology-focused STAR Market — home to semiconductor, artificial intelligence and other high-tech firms.

Even battery giant CATL, long considered one of China’s technology success stories, has come under pressure, falling 37% since the start of the year.

What’s driving the sell-off?

What started as profit-taking after a strong rally has turned into a broader reckoning over whether earnings can support current valuations.

“I think the sell-off primarily started as a valuation correction and some profit taking, but now there is a critical look happening at whether earnings can justify the AI excitement,” said Benjamin Cavender of China Market Research Group.

China’s technology rally accelerated after DeepSeek emerged in early 2025, fueling optimism that domestic companies could challenge U.S. counterparts in artificial intelligence.

That optimism has since faded as investors question how quickly companies can turn heavy AI spending into profits.

Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, said investors want to see how China’s tech giants translate their AI spending into earnings, noting that several AI initial public offerings attracted strong initial demand before enthusiasm faded.

However, the challenge extends beyond technology.

China’s prolonged property downturn has battered household confidence, while weak consumption continues to weigh on the advertising and e-commerce businesses of major internet platforms.

Vey-Sern Ling, senior equity advisor at Union Bancaire Privée, warned that rising AI investments could further pressure near-term earnings, with longer-term monetization prospects still uncertain.

“Chinese tech stock valuations have reached multi-year lows, which should limit downside, though upside catalysts remain elusive,” he said.

CATL’s profitability problem?

The pressure is also evident among China’s battery champions.

CATL, a major beneficiary of the global electric-vehicle and energy-storage boom, posted roughly 59% revenue growth in the third quarter, while net profit rose only about 15%.

Competition, shifting product mix and changes to taxes and rebates are squeezing…