An analysis suggests that the second optimal buying opportunity of the year for Chinese equities may now be present. Following a report issued on March 23rd when the Shanghai Composite Index fell below the 3,800-point threshold, which flagged a buying opportunity, and a subsequent note on July 14th positing that a market rebound could materialize within one to two weeks, recent market developments indicate that this second entry point for the year has likely arrived.
The Shanghai Composite Index Hits a New Year-to-Date Low Amidst Multiple Pressures
The A-share market has experienced a significant pullback recently due to a confluence of domestic and international factors. Globally, since late June, negative narratives surrounding the global AI industry chain have increased. South Korean equities saw sharp declines amid a deleveraging environment, with risk sentiment spilling over to A-share tech hardware sectors and U.S. stocks. Recurring geopolitical risks have also suppressed investor risk appetite. Domestically, the A-share market witnessed episodes of overheated trading from mid-May to late June, with turnover rates exceeding 5% of free-float market capitalization. Concurrently, excessive trading concentration in the technology sector led to a deterioration in market microstructure, culminating in a broad-based decline as tech stocks corrected. The sell-off accelerated from July 15th to 17th, with the Shanghai Composite Index falling 3.0% on July 17th alone, breaching the low set on March 23rd (a period marked by investor pessimism over geopolitical risks) to establish a new year-to-date low. The ChiNext and STAR 50 indices both fell over 7% in a single day, with their monthly declines ranking as the third and first largest in their respective histories.
Limited Systemic Risk from Isolated Liquidity Feedback, Monitoring for Further Developments
Concerns have been raised about negative liquidity feedback affecting a small number of companies, but the actual systemic risk is deemed very limited at present. As of July 17th, approximately 35% of A-share companies had fallen more than 20% below their 60-day moving averages. Coupled with a rapid decline in margin financing balances, investor anxiety over potential forced liquidations has increased. However, the impact is considered minimal. Forced liquidations remain extremely rare, with multiple brokerages reportedly stating that overall risks in margin financing are controllable and that widespread forced closures are not occurring. Furthermore, the proportion of margin financing balance to free-float market capitalization and its share of total turnover remain significantly below historical peaks. While margin balances surged past RMB 3 trillion to a record high earlier this year, they have since retreated by approximately RMB 172.5 billion from their June peak. The current margin balance represents only about 5.5% of A-shares' free-float market cap and 8.7% of turnover, roughly half the levels seen at the 2015 peak, and even lower when considering off-balance-sheet leverage prevalent at that time.
Current Market Adjustments Driven Largely by Short-Term, Transient Factors
Several factors behind the recent A-share correction appear short-term and have likely been substantially digested. The global AI industry chain remains in an expansion phase, with key overseas companies entering a critical earnings validation period in late July. Analysis suggests the AI sector's development remains relatively healthy, with its underlying commercial logic intact. Supportive policies announced at a recent global AI conference are expected to further propel related domestic industries.
In South Korea, the market deleveraging has entered a phase of government intervention. Regulators have introduced measures including suspending approvals for new single-stock leveraged ETFs and raising margin requirements, leading to a noticeable reduction in leveraged ETF sizes.
In the U.S., signs of cooling in the labor market and inflation suggest the risk of further interest rate hikes may have been overpriced by markets. Recent data, including softer-than-expected non-farm payrolls and CPI figures, support the Federal Reserve maintaining its current policy stance.
Within the A-share market itself, previously overheated trading sentiment has cooled markedly. Average daily turnover has contracted, and the excessive trading concentration in the TMT sector, which once accounted for a record 52% of A-share turnover, has eased to around 47%, with the semiconductor sub-sector's share falling from over 20% to approximately 17%.
A-Shares Present Attractive Investment Proposition with Accumulating Positive Catalysts
The A-share market currently possesses several favorable conditions, making it attractive both historically and relative to global peers, while short-term positive factors are accumulating. Corporate earnings are expected to deliver the best performance in the past five years, with the interim reporting season providing fundamental support. Forecasts for 2026 point to robust profit growth, potentially the highest since 2022, driven by sectors like AI hardware, industrial metals, and financials benefiting from market activity.
Valuations for Chinese assets are at relatively low levels compared to major global markets, and year-to-date performance has lagged, enhancing their investment appeal. Following the recent correction, forward P/E ratios for major indices have declined further from March-end levels. Valuations for previously stretched growth and small-to-mid-cap styles have also corrected significantly.
Short-term positive catalysts are building. State-owned investment platforms have announced share purchase plans to support market stability. Additionally, a wave of corporate share buyback announcements has been reported, and regulatory bodies continue to emphasize measures for stabilizing capital markets.
Market May Have Priced in Excessive Pessimism, Presenting a Strategic Allocation Window
In summary, the view is that the market has likely priced in overly pessimistic expectations while positive factors are gathering. There is little reason for prolonged pessimism towards A-shares, as major indices are forming another relative low for the year, signaling that the second annual buying opportunity may be at hand. From a medium-term perspective, the market is expected to resume a震荡上行 trend. The core drivers of the ongoing market advance and asset re-rating—global order restructuring and domestic industrial innovation—remain intact and should continue to support Chinese asset performance. The market's resilience and attractiveness have strengthened, laying a foundation for sustained, healthy growth.
Investment Strategy: Embracing Innovation While Managing Divergences
From a tactical standpoint, high-dividend, low-volatility strategies may offer relative resilience in the near term amid market fluctuations. Over a medium-term horizon, while growth is still favored, its outperformance relative to other sectors may moderate. Following a three-year capacity reduction cycle and policy efforts, an increasing number of cyclical industries stand to benefit from improving supply-demand balances. Investors are advised to focus on two main themes in light of the recent rapid adjustment. First, selectively investing in high-growth sectors: Industries with sufficiently strong fundamentals, such as AI infrastructure (e.g., optical communication, PCBs), can offset macro headwinds. Differentiated performance is expected within the tech growth space after significant adjustments. Innovation drug companies entering clinical validation phases also warrant bottom-up attention. Second, cyclical recovery: Sectors where fundamentals are rebounding from cyclical troughs, such as power grid equipment, petrochemicals, engineering machinery, and non-bank financials, merit consideration. The precious metals sector, after considerable adjustment, is also worth watching. The recovery pace for purely domestic demand-oriented industries remains relatively slow and requires further observation.
Comments