Chinese profits increased by 25.7%. The CSI 300 decreased by 9%, while the Star 50 dropped by 29%.

      Profits for Chinese companies listed onshore increased by 25.7% in the three months leading to June, marking the fastest growth in nearly five years, particularly concentrated in AI-related sectors. The CSI 300 Index has experienced a decline of about 9% this quarter, while the tech-centric Star 50 Index has decreased by 29%, as investors have started viewing AI expenditures more as a cost instead of a potential benefit.

      Earnings growth was limited, with UBS Securities estimating a 42% rise in profits on the ChiNext board and an impressive 370% on the Star board, significantly outpacing the main board. This growth was driven by companies associated with AI, yet the market still opted to sell off these stocks, likely due to much of the optimism already being reflected in the prices.

      Alibaba saw a decline in Hong Kong trading following its announcement of increased revenue coupled with a notable drop in profit, attributing this to expenses related to AI projects and computing infrastructure. The company is raising $10.2 billion for further investments in these areas. Tencent also saw a decrease after significantly increasing its AI expenditure, but neither company's results were considered poor in isolation. According to TNW, Tencent's capital outlay surged by 176% to 52.8 billion yuan, resulting in a negative free cash flow of 13.8 billion yuan.

      "Strong numbers no longer suffice for tech," remarked Vey-Sern Ling, managing director at Union Bancaire Privee, highlighting the uncertainties surrounding AI investments, ambiguous returns, and rising financing costs.

      On the domestic front, demand remains weak, the property market continues its prolonged downturn, and a stronger yuan led to 107 billion yuan in foreign exchange losses for non-financial A-share companies in the first half of the year. New market entries are also impacting liquidity for existing stocks, with Yangtze Memory among the new listings yet to come. Furthermore, tax regulations have tightened.

      It's noteworthy that the AI-related activities are not confined to the domestic market. TNW has observed similar patterns in cash flow among Big Tech companies, but China stands out as the first major market to witness a complete capital expenditure cycle reflected in reported profits, followed by a downward adjustment.

      In contrast, Europe is positioned at the opposite end of this cycle. Its expenditures have yet to materialize or be reported, and its involvement is largely through the supply chain rather than direct operators. The European Commission has pledged EUR 20 billion towards AI gigafactories, attracting 77 proposals across 16 member states for a total of 60 sites, with the first construction anticipated for 2027. Europe will gain insights into the impact of this funding on its performance several years after similar experiences in Shanghai.