China Stocks Hit Worst Run Since 2001 as AI Momentum Fades

JAKARTA — This was supposed to be China’s comeback year in global markets. Instead, Chinese stocks are posting their worst performance since 2001 — and investors are running out of patience.

Hong Kong’s Hang Seng Index, dominated by Chinese companies, last week hit its lowest level against the MSCI All-Country World Index since 1990. That’s an era when China’s economy was roughly 2% of its current size — three years before the first mainland Chinese company ever sold shares in Hong Kong.

That number isn’t just a statistic. It’s a clear signal that global investor confidence in Chinese markets has reached a genuinely fragile point.

From DeepSeek Euphoria to Disappointment

Last year felt different. The emergence of DeepSeek captivated markets — China’s AI model seemed to prove that Silicon Valley wasn’t the only player in the room. Foreign investors poured back into Chinese equities. The “uninvestable” label that had stuck for years began to peel off.

But that euphoria didn’t last.

“I was very positive on China last year after attending an AI conference in Hangzhou,” said Chauwei Yak, CEO of GAO Capital Pte in Singapore. “What’s more depressing is that the only country doing worse than China is Indonesia. China is a very high-tech country, yet the only country they can beat is one with far more problems.”

Yak’s words sting. They also capture just how deep the disappointment runs among investors who were genuinely optimistic just twelve months ago.

Gerald Gan, Chief Investment Officer at Reed Capital, called Chinese stocks the “main drag” on his portfolio this year. “We hold Tencent and Alibaba, but their performance has been terrible. The performance divergence among major economies right now is just too wide — and genuinely disappointing,” he said.

Three Pressures Hitting at Once

This slide didn’t come from one place. Three major forces arrived simultaneously.

First, China’s domestic consumption keeps weakening. Last month, retail sales fell for the first time since the pandemic. Home prices are dropping faster. Fixed-asset investment is shrinking. Internet companies and automakers are feeling it directly through eroded profits.

Second, the global AI boom isn’t actually benefiting China’s position. Investors right now prefer chipmakers over large cloud companies. China lacks leading domestic hardware manufacturers — so when global funds flood into semiconductors, China captures very little of that flow.

Third, regulatory risk is back. Beijing’s crackdown on cross-border capital flows has triggered tighter scrutiny of Hong Kong investments. Old anxieties about government intervention have reawakened.

Larry Hu, head of China economics at Macquarie Group in Hong Kong, forecasts second-quarter GDP growth will slip to around 4.4% — below the official full-year target. “If global AI trade keeps surging and lifts exports, the government won’t roll out major stimulus to boost domestic consumption, so internal demand will stay weak,” he said.

Big Tech Burns Capital — But Results Aren’t There Yet

The irony is stark. Just as markets slump, China’s tech giants are torching capital on AI at a historic scale.

Tencent plans to more than double its 2026 capital expenditure to over 36 billion yuan — roughly $5 billion. Alibaba has committed 380 billion yuan over the coming years. The numbers are staggering.

But markets don’t believe the returns will come quickly. Not yet.

Tencent last month reported its slowest revenue growth in six quarters. Its core businesses — gaming and advertising — are losing momentum, while its AI monetization model remains unclear. Alibaba posted its first quarterly operating loss since 2021.

The trouble doesn’t stop there. Anthropic last week accused Alibaba of a large-scale attempt to illegally access its “Claude” AI model. The U.S. Department of Defense also accused Alibaba, Baidu, and BYD of supporting China’s military. These geopolitical pressures add to an already long list of risks investors must price in.

Two Chinas on the Exchange: Onshore Holds Firmer

What’s striking is that China’s domestic market — Shenzhen and Shanghai — has proven relatively resilient. The CSI 300 index is up around 6% this year, lifted by a rally in technology hardware stocks.

Kevin Net, Head of Asian Equities at Financière de l’Echiquier in Paris, chose this route from the start of the year. “Most of the themes we like are listed in Shanghai and/or Shenzhen — AI, industrials, and metals,” he said. “What you find in the offshore market is consumer, internet, non-AI tech — exactly the sectors we tend to avoid.”

Outside domestic tech, conditions are bleak. Eight of ten CSI 300 industry sectors are in the red. Consumer stocks have fallen more than 20%.

When Can Confidence Return?

That question has no clear answer. As long as China’s domestic consumption fails to recover and Beijing holds back from major stimulus, pressure on offshore Chinese stocks is likely to persist.

The slump also threatens Hong Kong’s recently buoyant IPO pipeline. If foreign investors keep retreating from China’s offshore market, deal flow could take a hit too.

The real test: whether Tencent and Alibaba’s massive AI spending can start generating real revenue before investor patience fully runs out. If China’s tech giants fail to prove AI monetization within the next few quarters, the “uninvestable” label that fell away last year could stick again — and this time, it may be far harder to shake off.

Three key takeaways:

1. The Hang Seng hit its lowest level against the MSCI World index since 1990 — China’s worst stock market performance since 2001.

2. Three forces are hitting simultaneously: weak domestic consumption, China missing out on the global chip AI boom, and renewed regulatory risk.

3. Tencent and Alibaba are burning massive capital on AI, but returns haven’t materialized — and U.S. geopolitical pressure is intensifying.

Quick FAQ

Why is the Hang Seng falling harder than China’s domestic market? The Hang Seng is dominated by consumer, internet, and non-chip tech companies — the sectors hit hardest this year. The domestic CSI 300 has more exposure to hardware and industrial stocks that are actually rising.

Does this mean Chinese stocks are completely unattractive? Not across the board. Investors like Kevin Net still find opportunities in Shanghai and Shenzhen’s onshore market, particularly in AI hardware, industrials, and metals.

When could things improve? Two things are key: consumer stimulus from Beijing, and proof that Tencent and Alibaba’s AI investments can generate real revenue in the near term.