China’s AI Boom Is Making Star 50 the Stock Index That Matters

(Bloomberg) — Investors looking to track China’s hottest companies are shifting their focus away from the country’s traditional stock indexes.

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As the artificial intelligence boom reshapes the corporate hierarchy, the technology-dominated Star 50 Index is emerging as the most relevant gauge for the equity market, less than a decade after its creation. It’s overshadowing longtime stalwarts like the CSI 300 Index, a blue chip index that’s heavy on financials, industrial producers and consumer companies even after a recent influx of high-tech names.

China is pouring trillions of dollars into technology self-sufficiency across semiconductors, advanced manufacturing and hardware production. As a result, the Star 50 now offers a concentrated bet on AI with 86% of its firms in information technology and has outstripped the traditional benchmark by about 30% this year.

“If you believe in China’s capacity to engineer, iterate, manufacture and mass-produce technology products and adapt quickly to shifts in global industry trends, then the STAR 50 is a compelling allocation,” said Shi Junbo, a fund manager at Hangzhou Xiyan Asset Management.

The Star Market was unveiled by Xi Jinping in 2018, in the early days of the trade war during Donald Trump’s first term as US president. Authorities have fast-tracked IPO approvals for firms deemed strategically critical, which quickly raised its status as a wave of marquee Chinese companies along the AI supply chain rushed to raise funds.

The widening gap in Chinese equity benchmarks mirrors a global trend, with investors rewarding the companies supplying the infrastructure behind the AI boom. In China, that trade has played out in corners of the market that many foreign investors remain underexposed to, Goldman Sachs wrote in a note, describing the STAR 50 as a “proxy for onshore AI hard tech.”

And that’s even before the index was able to capture the excitement over a recent wave of high-profile initial public offerings — and a healthy remaining pipeline of industry leaders preparing for listings. While the Star 50 includes homegrown champions like Moore Threads Technology Co. and MetaX Integrated Circuits Shanghai Co., memory chipmaker CXMT Corp., now the most valuable Chinese company, is widely expected to be included by the end of the year.

Adding to the anticipation, Unitree Robotics surged 460% in its Star board debut Wednesday. China’s first listed maker of humanoid robots will also likely achieve Star 50 membership at least a year before being included in the CSI 300. Index rules for the CSI 300 Index bar companies on the Star board from membership until they have listed for at least a year.

The addition of such high-profile names could turn the Star 50 into a broad reflection of China’s homegrown AI ecosystem. Nine of the top 10 constituents are currently semiconductors, led by Advanced Micro-Fabrication Equipment Inc., while an exchange traded fund tracking the gauge is now the market’s second largest equity ETF, with more than $13 billion of assets.

The recent rally has also made the Star 50 comparatively expensive. It trades at a multiple of 57 times forward earnings, data compiled by Bloomberg. That compares with about 14 times for the CSI 300 Index and 22 for the similarly chip-heavy Philadelphia Stock Exchange Semiconductor Index. Part of the reason for the lofty premiums has been Beijing’s unwavering support for technological self-reliance as competition with the US intensifies.

“Star 50 members still lack the kind of innovation premium enjoyed by some global technology leaders, so if the AI narrative weakens, valuations are likely to slump,” said Shi at Hangzhou Xiyan.

Still, the support from Beijing continues. Last month, state funds were observed prioritizing support for an ETF tracking the Star 50 gauge over their usual favored CSI 300 vehicles, reinforcing the idea that Beijing views the stability of the tech-focused gauge of high importance. Increasingly, that gives the technology-heavy index a role for investors, in addition to the broader gauges, according to Vey-Sern Ling, managing director at a managing director at Union Bancaire Privee.

“Strong interest in semiconductors and clear government backing for strategic technology sectors are making the STAR 50 increasingly important,” he said. “The CSI remains the more diversified benchmark and is still the index most global investors associate with Chinese equities.”

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