China’s consumer stocks are trapped in a lost decade as Beijing’s focus on artificial intelligence redirects capital away from domestic demand. The MSCI China consumer goods sub-indexes have fallen roughly 18% over the past six months to near 10-year lows, while the AI-heavy technology gauge has more than doubled since 2016. During the latest earnings season, consumer staples firms in the MSCI gauge missed profit expectations by nearly 50%, with August retail sales rising only 0.4%.

Fund manager Chen Shi of Shanghai Jade Stone Investment Management Co. noted a crowding-out effect, where investors concentrate on AI beneficiaries while selling off consumption sectors indiscriminately. The sour mood contrasts sharply with pre-pandemic optimism about China’s rising middle class, now dampened by a property slump, sluggish income growth, and weak consumer confidence. Companies like Shede Spirits Co., Nanjing Central Emporium, and Kweichow Moutai Co. reported declining performance, with consumer staples earnings falling 47% short of expectations.

In contrast, industrial and tech firms delivered upside surprises. Analyst Winnie Wu of Bank of America highlighted global investor shifts toward AI beneficiaries and domestic policy headwinds such as tighter tax rules that burden households and businesses. Despite depressed valuations—consumer discretionary and staples trading at 11 and 13 times forward earnings versus 21 for tech—Beijing’s reluctance to deploy aggressive stimulus limits near-term recovery prospects.