The AI bubble already popped — in China

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Good morning. Anthropic’s prospectus appears to have injected new life into the AI trade. The Nasdaq is up almost 2 per cent this week, and the semis, in particular, are leading the charge. Meta, whose spending plans spooked markets just last week, managed to sell $25bn of new equity (admittedly at a steep cost to incumbent shareholders: the stock is down almost a fifth in two weeks). Maybe the AI boom is just getting started. Or maybe it’s naked opportunism? Tell us which: unhedged@ft.com.

Chinese stocks

The AI story is, at least in part, about competition between the US and China. The US has Anthropic, OpenAI and Google DeepMind. China has Moonshot AI, Z.ai, DeepSeek, MiniMax and Alibaba. So far, only one of the US companies — DeepMind, via its ultimate parent Alphabet — is public. But that hasn’t stopped the broader market from trading as if they all were. In China, AI exuberance may already have come and gone.

Until recently, Chinese AI offered investors something US AI did not: pure exposure to frontier model makers. In January, Z.ai and MiniMax listed on the Hong Kong Stock Exchange at multibillion-dollar valuations.

The market reaction was enthusiastic, initially. Z.ai rose 55 per cent in the first month of trading; MiniMax rose 33 per cent. But the correction came fast. MiniMax peaked in March and is now trading 50 per cent below its IPO price. Z.ai has done better, but only for investors with nerves of steel. It peaked at 732 per cent above the IPO price, in June, before shedding 63 per cent of its value in under a month, as Asian AI stocks sold off. Still, it’s up 318 per cent year to date.

Part of the explanation lies in the Chinese companies’ business models. US AI labs have been focused on charging for access to the models. Chinese labs are more comfortable giving away the model and charging for access to processing power. These “open weight” models have created intense price competition — in both China and the US — and raise questions about whether AI revenues can support the level of investment required to develop ever more powerful models.

This is an AI boom and bust in miniature, and it has dragged down China’s broader tech sector. The Hang Seng Tech index, which tracks 30 major technology companies listed in Hong Kong, is down 30 per cent year to date. But broader market returns have been dismal for well over a year. The MSCI China index, which includes large and mid-size companies in tech and other sectors, is down 30 per cent in 2026. Gavekal Research’s Louis-Vincent Gave writes:

Chinese equity markets have now fallen for 10 consecutive weeks, a feat they had never achieved before. This in spite of the fact that (a) excitement over all things “artificial intelligence” has been a key driver of global equity market performance and that (b) China is one of the few countries outside of the US actually registering notable gains on the AI front.

Chinese equity markets have now fallen for 10 consecutive weeks, a feat they had never achieved before. This in spite of the fact that (a) excitement over all things “artificial intelligence” has been a key driver of global equity market performance and that (b) China is one of the few countries outside of the US actually registering notable gains on the AI front.

One theory for why is that Chinese equity markets have been the “funding trade” for the semiconductor play in Korea and Taiwan, which Gave says has been “sucking all the oxygen out of the room”. It would take a slowdown in the AI capex boom for some of that money to flow back, he argues.

There’s some evidence that Chinese authorities are concerned about equity market underperformance. And there are signs that the government is willing to intervene. But this does little to get at the root issue, which is a slowing economy and deflationary pressure. Chinese stocks have further to fall.

Chinese bonds

In the search for diversification from the US monotrade, one could do worse than look to Chinese government bonds. According to Gave, CGBs are the only major bonds that have beaten US inflation in dollar terms since 2020:

The key factor is inflation, of course. The yield on the 10-year CGB is at 1.6 per cent, down from about 1.9 per cent in January. And the spread between the yield on 10-year US Treasury and CGB — 3.3 per cent — is the widest it has ever been. That tells you what you need to know about the difference in inflationary expectations for the world’s two largest economies.

Foreign investment in CGBs remains low, despite recent efforts to make it easier to access the bonds and manage risk. The share of overseas holdings is just under 5 per cent (compare that with close to a third of US Treasuries). But that low share may actually be a source of strength, making the bonds less vulnerable than Treasuries — whose investors have become more price sensitive — to a sudden sell-off.

China’s capital controls may be another source of strength. The procedures around repatriating capital add real friction to investment in China — to say nothing of the psychological and risk barriers. But, from the point of view of diversification, capital controls can be seen as a feature, not a bug. Ward Brown of MFS Investment Management notes that “[CGB does not] interact with the rest of your portfolio in at all the same way”.

In other words, high domestic ownership and capital controls mean Chinese bonds have low volatility and limited correlation with other assets. If you take the view — as many analysts do — that the Renminbi is on a path of slow appreciation, that adds an additional source of yield.

CGBs have a long way to go before becoming a popular retail investment, or even a major international reserve asset. But as part of a diversification strategy for large portfolios, they are worth a look.

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