Tech Rally in China: Cambricon on the Rise Despite Index Reshuffling

China's tech stocks continue their surge, with investors particularly focused on the shares of Cambricon Technologies. Despite an impending reshuffle in a major technology index, which could trigger passive selling of over $1 billion, confidence in the strength of the AI chip manufacturer remains unshaken. In August, shares of Cambricon, often dubbed China's answer to Nvidia, doubled. This led to an increase in weighting in the tech-focused STAR50 Index, which has now exceeded the 10% limit for individual stocks. Stock analysts anticipate that the upcoming index adjustment, after Friday's market close, could result in passive outflows of up to 8 billion yuan, approximately $1.1 billion, affecting Cambricon. Last week, Cambricon shares fell by 14% due to profit-taking and concerns about the reshuffle, but they quickly rebounded, rising 10% this week close to a record high. According to LSEG data, Cambricon is currently trading at 521 times earnings, compared to 50 times for Nvidia. However, fund managers and analysts are optimistic that the adjustments will not hinder the overarching growth in China's AI sector. The enthusiasm for AI stocks is fueled by Beijing's support for domestic innovations and investments from major tech companies Alibaba, Tencent, and Baidu. The global AI euphoria has driven the technology-heavy Nasdaq to new heights this year, propelled by a 32% increase in Nvidia's stock price. Cambricon, on the other hand, has marked a 113% increase since the beginning of 2023, with a significant portion of gains after announcing first-half earnings. Analysts are now confident that China's AI industry has passed a turning point. Founded in 2016 and listed on Shanghai's STAR Market since 2020, Cambricon Technologies, a Beijing-based maker of AI chips, has drawn attention with its stock surge. Meanwhile, the Chinese tech bull market has continued its twelve-month high, with domestic stocks reaching their international counterparts in recent weeks and lifting the broader Shanghai market to a level not seen in a decade. The rapid rise in Cambricon’s shares has also highlighted valuation concerns, prompting the firm to issue a risk warning last month. Company head Abraham Zhang emphasized the investors' dilemma between the hope that Cambricon can replace foreign AI chips and the fear of creating a speculative bubble.