According to a strategy analyst from China Securities Co., Ltd. (ASX: 601066), Xia Fanjie, the selling pressure on the technology sector will significantly ease once external risk sources gradually subside.
Xia Fanjie stated on the afternoon of the 21st that the noticeable pullback in the A-share market since July represents a technical adjustment driven by capital flows and trading structures, rather than a deterioration in fundamentals. He believes that with the market having undergone a full adjustment and external risks receding, this round of market correction is essentially over, and a stabilization and rebound could occur at any time.
He asserts that the firm inflow of medium to long-term capital can intervene promptly to break negative feedback loops during market liquidity crises or when expectations lose their anchor, thereby providing a new pricing benchmark. As the market fully adjusts and external risks dissipate, this correction phase is largely concluded, potentially paving the way for a new upward trend.
Analyzing the reasons for this pullback, he pointed to external factors. Starting from late June, the South Korean stock market, under dual pressures from high domestic leverage and foreign capital outflows, was the first to trigger a deleveraging negative feedback loop of "decline-forced liquidation-further decline." The KOSPI index retreated approximately 25% from its peak and experienced multiple trading halts. This liquidity shock transmitted through the supply chain to U.S. tech stocks and the A-share market, compounded by rising oil prices due to geopolitical tensions and a global retreat in risk appetite.
Regarding internal factors, key A-share sectors like AI and semiconductors had seen substantial prior gains and became extremely crowded trades, leading to concentrated sell-offs by margin traders and momentum funds. However, the fundamental picture remains unchanged, with capital expenditure from overseas AI giants and memory chip sector conditions still positive. Earnings reports from companies like TSMC exceeded expectations, indicating the underlying industry trends remain intact.
Consequently, Xia Fanjie believes the market is poised for stabilization and a rebound for three key reasons.
First Reason: Sufficient Correction Depth
He notes that the current A-share correction has been relatively deep, with pressures from high valuations and crowded trades largely alleviated. Data shows that from early July to now, the maximum drawdown for the Wind All-A Index reached 16.8%, the Shanghai Composite Index 9.7%, while the ChiNext and STAR 50 indices saw maximum drawdowns of 23.5% and 27%, respectively.
Historical experience suggests that when major indices in a bull market fall below their annual moving averages and tech/growth indices approach key moving averages, it often presents a good opportunity for positioning at lower levels.
Second Reason: Shift in Pricing Power Driven by Capital Inflows
The steady influx of medium to long-term capital is set to drive a transfer of pricing power in the A-share market. On the capital and news front, broad-based ETFs tracking indices like CSI 1000, CSI 500, and STAR 50 have seen continuous large-scale capital inflows in recent days. On the evening of July 19th, China Reform Holdings Corp. and China Chengtong Holdings Group Ltd. issued announcements expressing firm confidence in the prospects of China's capital markets, disclosing purchases worth about 60 billion yuan and stating intentions to continue increasing holdings of central state-owned enterprise stocks and technology assets.
Furthermore, on July 20th, three major insurance industry leaders—Ping An Insurance, China Pacific Insurance, and New China Life Insurance—issued related announcements expressing support for capital market development and enhancing shareholder returns, sending positive signals to the market.
Third Reason: Stabilization of External Markets
U.S. and South Korean stock markets have already stabilized successively, with external risk sources gradually subsiding. The global sell-off in chip stocks has largely concluded.
With the gradual fading of external risk sources, selling pressure on the technology sector will also decrease significantly.
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