The MSCI China Index dropped as much as 2.1% Thursday, and at one stage was down more than 20% from its Oct. 2 high before trimming losses. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. were the biggest drags on the day. The Hang Seng China Enterprises Index slid 2.1%.

The grim milestone looms as a selloff in Internet and e-commerce stocks deepens. China's retail spending contracted in May for the first time since the pandemic, data showed this week. The downturn highlights the structural weakness of a benchmark lacking the kind of tech hardware giants that have boosted markets such as South Korea and Taiwan.

"The China tech stocks are victims of the success of their North Asian neighbors," said Vey-Sern Ling, managing director at Union Bancaire Privee in Singapore. "The opportunity cost of sitting on China tech stocks is very high when the other regions are outperforming."

The MSCI China gauge remains dominated by Internet and consumer companies listed in Hong Kong, with Tencent having a weighting of 13% and Alibaba constituting 10%. The index has missed out on the global rally fueled by the AI investment boom, which has pushed markets such as Taiwan and Korea to records thanks to the strength of their world-leading chipmakers.

The woes are also reflected in the poor performance of Hang Seng China Enterprises Index, which is the second-worst performer year to date among more than 90 indexes tracked by Bloomberg globally. The Hang Seng Tech Index tumbled into a bear market earlier this year.

The Internet sector that once drove enthusiasm for offshore Chinese equities is losing momentum. Companies including Alibaba and Tencent reported revenue for the March quarter that fell short of estimates amid big investments in AI, fierce domestic competition and weak consumer sentiment.

In contrast, the tech-focused indexes listed onshore are surging. The Star 50 Index, which has chipmakers as its members, rallied on Thursday to a record.