Is China's AI Profit-Taking a Sign of an Impending Bubble?
China's leading AI hedge funds are cashing in on their gains. With AI investments like Shanghai Everlead Capital up 164% this year, the market wonders: is this just profit-taking or the prelude to a bubble burst?
Is the recent sell-off by China's top AI hedge funds just profit-taking, or is it a harbinger of an impending bubble burst? That's the question on many investors' minds as Shanghai Everlead Capital and Hunjin Capital begin cashing in on their massive gains.
Raw Data: The Numbers
Let's look at the facts: Shanghai Everlead Capital's AI investments soared by 164% this year. In response, the fund started booking profits, particularly in optical and chip-packaging stocks. These stocks had experienced a meteoric rise, with Zhongji Innolight's market cap surpassing a trillion yuan and Yangtze Optical Fibre rallying twelvefold. It's not surprising that such massive gains would prompt profit-taking.
Hunjin Capital also followed suit, trimming positions in crowded AI holdings like memory-chip stocks. These stocks are expected to face pricing pressures, leading to a shift towards more traditional, cheaper stocks. As of now, the AI hardware cycle is about 60% complete, double what it was in February.
Context: Why It Matters
This isn't the first time we've seen a market rotation. The reality is that money's moving out of the hottest AI trades, which used to include the likes of compute and chip stocks. These sectors gained about 62% but fell by around 13% last month. Power and infrastructure stocks initially rose 11% but have since stalled.
Conversely, app and software stocks, which lagged all year, began to see fresh investments, gaining roughly 5% last month. This pattern suggests a late-cycle rotation rather than market panic. So, is this a repeat of past tech booms, or is AI fundamentally different?
Insider Perspectives
Traders are watching the situation closely, particularly the 2027 spending forecasts. Big tech's investment in AI, known as AI capex, is essential. It's expected to surpass $1 trillion in 2027, up from $600 billion in 2026. If this money keeps flowing, it supports the current thesis that this is just early profit-taking.
However, the threat lies in a 2027 plateau, where a price war could erupt. Chinese models now rival top U.S. systems at significantly lower costs, some as much as 55 times cheaper. This undercuts the return on all that AI spending, potentially leading to reduced capex by big tech firms.
What's Next: Watch the Capex
So, what's the street missing? The deciding factor remains the AI capex. If these investments continue to flow, this phase is merely profit-taking. But if they don't, it could signal the start of an AI bubble burst.
Investors should keep an eye on big tech's capex commitments for 2027. Will they maintain the expected trillion-dollar spend, or will they pull back in response to thinning margins? The numbers tell the story, and it's critical to have a clear view of where the AI trade could head from here.