Taking the "surge" of Japanese internet stocks in the 1990s as an example, Bank of America Merrill Lynch: There is still room for the Chinese AI market, but

Author of this article: Long Yue

Under the global AI boom, the Chinese AI sector is extremely hot, but it has also raised concerns about market overheating.

On September 3rd, Bank of America Merrill Lynch pointed out in its latest "Global Equity Volatility Insights" report that the rise of Chinese AI stocks is accelerating. However, key indicators such as volatility do not yet show the typical characteristics of an asset bubble peak, which means there is still potential for further increases.

However, given the relatively limited supply of Chinese AI concept stocks, if retail investors' "fear of missing out" (FOMO) sentiment spreads, a large amount of capital chasing a small number of stocks could elevate bubble risks, potentially leading to extreme surges similar to the 1990s Japanese internet bubble.

Volatility Signal: Bubble Still in Early Stage, Room for Further Increase

Since July, Cambricon's stock price has increased by over 146%. Earlier this week, tech giant Alibaba also announced triple-digit growth in AI-related revenue, which once drove its stock price up by 18% at the opening. This series of positive signals has continued to heat up the Chinese AI market.

However, the report indicates that the current rise in Chinese AI stocks is not accompanied by typical late-stage bubble characteristics. It tracked a portfolio of Chinese AI stocks including Alibaba, Tencent, Baidu, and Cambricon, showing that this portfolio achieved an astonishing return of 74.0% by 2025, but its 3-month realized volatility was 48.4%, lower than 52.1% in 2024.

The current level of market volatility has not yet reached the typical pattern seen before the peak of an asset bubble. Analysts stated, "The volatility indicates that we have not yet seen the late-stage patterns of an asset bubble... The Chinese AI market may still have significant room for movement."

This means that, despite significant increases in some stocks, the overall volatility suggests that the Chinese AI boom is still in a relatively early stage, with potential for further increases in the future. The report also emphasizes that since January of this year, despite facing multiple economic and macro challenges, the bullish sentiment towards the AI industry has made shorting Chinese stocks quite challenging and possibly premature.

Historical Reflection: Will the "Extreme" Bubble of 1990s Japan Recur?

However, Bank of America Merrill Lynch also warns that there is a risk of the Chinese AI market repeating the 1990s Japanese internet bubble.

The reason the Japanese internet bubble was more extreme than that of the United States was partly due to the domestic supply of internet stocks in Japan being far from meeting market demand. For example, SoftBank soared over 3000% in just over a year, with a volatility of 98%; while Oracle Japan's increase was more than double that of Oracle in the United States, demonstrating a stronger local bubble effect

The report analysis suggests that if the "fear of missing out" (FOMO) sentiment among Chinese retail investors spreads in the Chinese AI sector, and the supply of domestic AI stocks is insufficient to meet this demand, it could lead to similar or even more extreme market dynamics.

Additionally, Chinese investors are limited in their overseas allocations through the Qualified Domestic Institutional Investor (QDII) quota, which may further exacerbate this supply-demand imbalance domestically. Historical experience shows that when too much capital chases too few stocks, it can intensify market imbalances, and the risk of bubbles will sharply increase.

Furthermore, the report also highlights a regulatory issue, suggesting that when the market experiences "excessive irrational exuberance," regulators may step in to curb speculative behavior. However, the report emphasizes that any attempts to cool the market are likely to occur only after a bubble has formed and there is sufficient evidence of it.

Bank of America Merrill Lynch advises that under the long-term trend of further expansion of the AI bubble, the risk of short-term pullbacks remains and is considered a normal phenomenon. It is recommended to consider risk mitigation strategies through fixed exercise and low skew hedging strategies.

Risk Warning and Disclaimer

The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk