It was another punishing trading session for investors in China's A-share market today.
Following a systemic sell-off in overseas technology stocks, particularly in the semiconductor sector overnight, the three major A-share indices closed sharply lower. At the close, the ChiNext Index had plummeted by 7.15%, and the STAR 50 Index tumbled 7.12%, making these two innovation-focused sectors the hardest hit.
Data from Wind shows that on July 16, the Philadelphia Semiconductor Index plunged nearly 5% at one point during the session, marking a cumulative pullback of over 22% from its mid-June high. The previously high-flying memory chip segment faced concentrated selling pressure.
This pessimistic sentiment quickly spread to the Asia-Pacific markets. On July 16, the Korea Composite Stock Price Index fell over 7% intraday, triggering a collective rout in regional tech stocks.
"Talk of a bubble in overseas AI and semiconductor markets has been rampant recently. As OpenAI's potential IPO approaches, some market commentary has begun to question whether it possesses a business model capable of supporting the AI capital cycle. Consequently, valuations in related sectors are being scrutinized. Demand for data centers, GPUs, and other areas is predicated on the logic of AI's immense commercial value. As skepticism grows, it has led to declines in a series of previously high-flying related stocks, which in turn has impacted corresponding sectors in the A-share market," said Li Bing, head of investment research at China International Futures.
Pu Zulin, chief macro analyst at Zhenxin Futures, noted that major broad-based indices like the CSI 300, CSI 500, and the STAR Board are heavily weighted towards sectors such as semiconductors, memory, advanced packaging, and computing hardware. As the high valuations and crowded trades in the upstream hardware segment of the AI industrial chain enter a phase of concentrated unwinding, these broad indices have experienced significant declines, even though the fundamental industry conditions themselves have not deteriorated.
Another underlying concern fueling the market drop is apprehension regarding fundamentals. With the peak period for A-share listed companies to release their interim reports underway, investors are left questioning: are corporate earnings actually recovering?
According to Wind statistics, as of July 16, over 1,700 domestic companies had issued interim earnings forecasts. Among these, more than 1,000 companies projected positive earnings growth, with over 860 forecasting a maximum net profit increase exceeding 30%.
"However, some technology-focused listed companies have also seen a slowdown in profit growth during the second quarter. Overall, the market continues to exhibit the previous characteristics of industry divergence, with some sectors maintaining rapid earnings growth and ample orders, while others face significant challenges. These features are not unique to the current period. The overall earnings growth for tech stocks remains optimistic, with a solid foundation," Li Bing added.
Pu Zulin stated that an earnings recovery does not necessarily validate current valuations or guarantee sustained profit momentum. He explained that, on one hand, profit distribution within the current AI industrial chain is uneven, with rising memory chip prices squeezing downstream demand and system manufacturers' profits. On the other hand, a true killer application for AI has yet to emerge, its usage scenarios remain limited, and there are signs overseas of slowing growth in token usage and some tech giants cutting or optimizing their AI budgets.
"Based on the current situation, it's clear that the valuations for upstream AI tech stocks are excessively high, potentially pricing in prospects several years ahead. If liquidity conditions ease or market leverage is cleared, a moderately high valuation could become the norm, given the industry's overall rapid growth. The room for market adjustment is also limited," he said.
Whether this round of adjustment has reached its bottom is a key concern for the current market. Synthesizing the latest strategies from several securities firms shows that, despite pessimistic sentiment, professional institutions are not panicking. The mainstream view tends to believe that while the adjustment is entering its final stages, 'finding a bottom' does not equate to an immediate, broad-based rally.
"The current adjustment triggered by liquidity and industry narratives may be nearing its end," according to Industrial Securities, which noted that crowding indicators are signaling a short-term sentiment bottom. China International Capital Corporation (CICC) also suggested that the current market level may already reflect overly pessimistic expectations, and a favorable window for positioning within the year is re-emerging.
In Pu Zulin's view, the market is currently in a phase of structural rebalancing. He pointed out that the extreme divergence in performance between AI tech stocks and non-AI stocks since April was clearly driven by a combination of liquidity siphoning effects and crowded trades. Since July, this extreme divergence has significantly eased, as evidenced by the ratio between the CSI 1000 Index and the SSE 50 Index. However, a bottom is a zone, not a specific point. Currently, the STAR 50 Index and AI-related sectors, which are representative of the AI theme, have indeed given back a large portion of their gains from this rally. Yet, the logic behind the market decline is still playing out—for instance, the unwinding of leveraged funds in the South Korean stock market is not yet complete, and the adjustment in domestic AI heavyweight stocks has not fully run its course. Currently, small and mid-cap stocks and volatile thematic plays have fallen first. A true market bottom would require AI heavyweights to complete their decline, small and mid-caps to stabilize and stop falling, and trading volume to contract significantly before a recovery can begin.
"In the short term, as the external environment remains weak, especially with the ongoing adjustment in previously strong sectors like chips and semiconductors, it's difficult for the A-share market to remain unscathed. However, judging from valuation levels, index gains, and market leverage ratios, the A-share market has a relatively high margin of safety. The extent of index adjustment may be limited, and the market is likely to search for a bottom with volatility over the coming week," Li Bing concluded.
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