Chinese equity markets experienced a volatile and corrective session on Tuesday, with the ChiNext and Shenzhen Component indices opening lower and extending their losses throughout the day.
At the close, the Shanghai Composite Index was down 1.37%, the Shenzhen Component Index fell 3.17%, and the ChiNext Index tumbled 3.84%. The total trading volume for the Shanghai and Shenzhen markets was 3.44 trillion yuan, a decrease of 296.4 billion yuan from the previous session.
Market dynamics showed a loosening of institutional holdings in concentrated sectors, with most thematic concepts trending lower, leading to pronounced negative returns for investors.
In a counter-trend move, pharmaceutical concepts such as innovative drugs, CRO, generic drugs, and biopharmaceuticals surged. Stocks including Xinhua Pharmaceutical and Hengdi Pharmaceutical hit their daily limit-up.
The securities sector saw repeated activity, with Changjiang Securities and Huaan Securities also rising by the limit.
In the afternoon, the real estate sector strengthened against the broader market decline. Jintou Chengkai secured its second consecutive limit-up board, while Guangming Real Estate, Zhongzhou Holdings, and Huayuan Holdings all reached the daily limit.
On the downside, the PCB industry chain saw a comprehensive sell-off. The computing power metals concept retreated, while concepts related to minor metals, gold and silver, rare metals, and rare earths all plummeted.
Hardware concepts for computing power, such as optical modules, optical chips, and liquid cooling, declined across the board. The lithium battery concept also moved lower, and the photovoltaic sector continued to show weakness.
Key Factors Behind the Market Decline
Current analysis points to two primary reasons for the pullback: a synchronized correction across Asia-Pacific stock markets and profit-taking in high-flying technology stocks.
The broader Asia-Pacific region experienced significant declines. Japan's Nikkei 225 index closed down 3.55% at 69,788.38 points. South Korea's KOSPI index plunged 9.99% to 8,203.84 points, triggering circuit breakers twice during the session, which influenced the trajectory of both A-shares and Hong Kong stocks.
Technology stocks, particularly in sectors like AI and computing power that had seen sustained rallies, faced substantial profit-taking. High valuations and crowded trades led to a significant outflow of capital as investors locked in gains.
As technology stocks adjusted, sectors like innovative drugs, often considered "old economy" plays, showed signs of rising.
A Potential Shift in Market Style?
This raises the question of whether this signals an impending style rotation. Analysts note that while the AI sector does exhibit signs of crowded positioning, it also remains the sector with the highest visibility in terms of growth prospects.
Therefore, whether a successful style rotation will occur remains uncertain.
Outlook for the Market
Looking ahead, as June draws to a close and preliminary half-year earnings reports are about to be released, the market's focus on fundamentals and earnings quality is expected to increase.
The internal differentiation within the tech sector, the acceleration of rotation, and the broadening of thematic narratives suggest the market itself is becoming aware of the high crowding in technology-oriented trades. Subsequent attention should be paid to changes in trading volume and the sustainability of sectors participating in the rotation.
Highlights of Key Sectors
Pharmaceuticals Sector Strength
Pharmaceutical concepts, including innovative drugs, CRO, generic drugs, and biopharmaceuticals, surged against the market trend. Xinhua Pharmaceutical, Hengdi Pharmaceutical, and others rose by the daily limit.
This move was supported by news that Xinhua Pharmaceutical, part of the Hualu Group, received approval from the National Medical Products Administration for clinical trials of its self-developed Class 1 innovative drug LXH-2103 injection, marking a key step in its original innovative drug R&D and its layout in specific pharmaceutical categories.
Securities Sector Activity
The securities sector remained active, with Changjiang Securities and Huaan Securities hitting the limit-up.
This follows policy signals from the recent Lujiazui Forum, which highlighted further enriching investment products and tools, guiding pension and insurance funds to increase equity investments, supporting listed companies in mergers, acquisitions, and refinancing, and deepening reforms on key market boards.
Real Estate Sector Resilience
The real estate sector strengthened in the afternoon session. Jintou Chengkai achieved its second consecutive limit-up, while Guangming Real Estate, Zhongzhou Holdings, and Huayuan Holdings also rose by the limit.
Data from the China Index Academy showed that from June 1st to 20th, transactions of pre-owned homes in 20 key cities totaled 88,000 units, a year-on-year increase of 10.9%. Cities like Shanghai and Suzhou saw transaction volumes rise over 20% year-on-year, while Shenzhen and Ningbo saw increases exceeding 10%, indicating sustained demand activity beyond the traditional spring peak season.
Perspectives from Financial Institutions
One securities firm's view is that the market has internally recognized the high crowding in technology-oriented investments. As June concludes and half-year forecasts are released, the weighting of fundamental earnings in pricing is expected to increase gradually for safety reasons.
The rally in non-ferrous metals is essentially driven by resource demand related to AI. The market narrative has expanded from hardware itself to infrastructure and then to raw materials, representing a diffusion along the industry chain.
The simultaneous rise in indices and major sectors in both price and volume has helped establish the quality of the uptrend, laying a foundation for subsequent market movements. The internal differentiation within tech, faster rotation, and broadening narratives all indicate market awareness of high crowding in the tech direction. Future focus should be on changes in trading volume and the sustainability of rotating sectors.
Another securities firm noted that yesterday's significant increase in A-share trading volume and strong gains for the major indices reflect that the short-term market still possesses upward momentum. The effective接力 by some cyclical sectors to the hard tech theme suggests a potential pattern of healthy rotation between technology and cyclical directions, though whether this constitutes a true style shift requires further observation. In the short term, managing the rhythm of style rotation is key.
While the market is currently in a process of style rebalancing, the medium-term high-growth trend of the AI industry continues. As overseas tech giants release their half-year reports from mid-July to late August, the pricing logic for the AI tech direction is expected to return to fundamentals and earnings drivers.
A third firm's analysis suggests that the STAR 50 and ChiNext indices hitting new highs on heavy volume officially confirms the establishment of a new upward trend. The first trading day of the week saw a strong, volume-backed advance, with the average daily turnover for the entire A-share market returning above 3 trillion yuan, and the structural divergence between tech and non-tech sectors playing out to an extreme.
Tech growth and the dual-innovation direction led gains, with the STAR 50 and ChiNext indices posting significant weekly gains, solidifying the new uptrend. Externally, factors suppressing risk appetite have eased marginally. Internally, resonating with the global AI tech rally, the dual-innovation indices reached new highs on heavy volume, formally establishing the new upward trend. Key supporting factors include amplified trading and margin financing indicating a positive feedback loop of incremental capital, accelerated differentiation between old and new economic drivers concentrating funds in high-growth areas like AI and semiconductors, and policy guidance from the Lujiazui Forum emphasizing support for quality and technology, further solidifying the main thematic logic.
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