China Profits Surge 25.7% as CSI 300, Star 50 Plunge

Chinese corporate earnings have surged to their fastest pace in nearly five years, yet this financial resilience has done little to bolster the broader market. Profits for onshore-listed firms jumped 25.7% in the second quarter, a growth trajectory driven almost exclusively by companies involved in the artificial intelligence sector. Despite these robust bottom-line results, major indices have suffered significant declines. The CSI 300 Index has retreated approximately 9% during the quarter, while the technology-focused Star 50 Index has plummeted by 29%. This divergence marks a stark shift in investor sentiment, as the market begins to view massive AI expenditures as immediate costs rather than future promises.

The previous quarter had seen euphoric rallies, with the Star 50 surging 76% before the recent correction. However, the current earnings landscape is highly uneven. According to data from UBS Securities, profit growth on the ChiNext board reached 42%, while the Star board reported an explosive 370% increase. These figures dwarf the modest gains seen on the main board, confirming that the aggregate profit surge is narrowly concentrated in AI-linked entities. Consequently, even when these specific companies report strong financials, the broader market often sells off their shares, suggesting that much of the prior optimism was already priced in.

Major tech giants exemplify this tension between revenue growth and profitability pressures. Alibaba saw its Hong Kong-listed shares fall after reporting higher revenues alongside sharply lower profits, a discrepancy it attributed to heavy spending on AI projects and computing infrastructure. The company plans to raise $10.2 billion to further fund these initiatives. Similarly, Tencent experienced weakness in its stock price despite the move being strategically sound in isolation. As reported by TNW in August, Tencent’s capital spending skyrocketed by 176% to 52.8 billion yuan, causing its free cash flow to turn negative by 13.8 billion yuan. While both companies doubled down on their technological futures, investors reacted negatively to the immediate impact on their balance sheets.

Market analysts point to several structural headwinds complicating the picture. “Strong numbers no longer work for tech,” observed Vey-Sern Ling, a managing director at Union Bancaire Privee. He highlighted growing uncertainty regarding AI investments, ambiguous return on investment metrics, and rising financing costs as key deterrents. Domestically, weak consumer demand and a prolonged property downturn continue to weigh on the economy. Additionally, a stronger yuan resulted in 107 billion yuan in exchange losses for non-financial A-share companies in the first half of the year. Liquidity is also being drained by new listings, such as those from Yangtze Memory, while tighter tax enforcement adds another layer of pressure on corporate finances.

The phenomenon of markets punishing high capital expenditure is not unique to China, but it is occurring there first among large economies. While European tech firms are still in the early stages of spending, with the European Commission committing EUR 20 billion to AI gigafactories across 16 member states, the financial impact has not yet hit their reported profits. Europe’s exposure remains largely through supply chains rather than direct operator costs. Construction on the first European sites is not scheduled to begin until 2027, meaning European markets will likely face similar valuation adjustments years after Shanghai has already processed the reality of the AI capex cycle.