The sharp decline in SK Hynix shares triggered a sell-off in the global chip sector, leading to a 'Black Monday' for markets worldwide. A-shares followed suit, with the three major indices closing lower on Monday, and the STAR 50 Index dropping 3.4%.
The downward trend continued into Tuesday morning, with all major A-share indices in the red. The Shanghai Composite Index fell 0.66%, slipping below the 3900-point mark, while the STAR Composite Index and the STAR 50 Index declined 3.12% and 3.45%, respectively.
Unpacking the Tech Sell-Off
Industry experts point to overseas deleveraging as the immediate catalyst for this correction. The significant adjustment in A-shares and overseas tech stocks is directly linked to a reduction in leverage within overseas trading activities, with the A-share market indirectly following this trend. A chief strategist noted that over the past two weeks, there has been a noticeable decrease in margin financing balances in the South Korean market, alongside a rapid decline in implied volatility in the options market, indicating an exit of leveraged capital.
Another analyst from a major Chinese investment bank also believes that the transmission of risk sentiment from overseas market volatility is a key factor influencing the A-share pullback. The earlier substantial gains in leading memory chip stocks in South Korea were, to some extent, related to significant investor leverage.
Pressures from Overseas Deleveraging
In the view of one strategist, the margin financing ratio in South Korea had previously reached extreme historical levels, and overly optimistic expectations coupled with a slightly loosened fundamental backdrop triggered the decline. This overseas market downturn and deleveraging process have transmitted to the A-share market, evidenced by a decline in margin financing and securities lending balances, with the proportion of margin buying to total turnover also falling to a yearly low. The spread between the one-month implied volatility and the realized volatility of the STAR 50 Index has widened to -2.8%, another sign of deleveraging.
Another analyst explained that since the beginning of the year, a large number of leveraged ETFs have been issued in South Korea and other global markets. Estimates suggest the scale of related global leveraged ETFs once exceeded $50 billion, with their aggregate daily trading volume accounting for a significant portion of South Korean market turnover. Recently, as the narrative around memory chips shifted, the market decline in South Korea and stop-losses in leveraged trades formed a negative feedback loop, with the KOSPI index falling 27.5% from its peak. This risk sentiment has since spread to the U.S. stock market and A-share tech hardware sectors.
Simultaneously, the prevalence of negative AI-related narratives overseas is also seen as a factor affecting the tech sector. For instance, Apple raised prices for its Mac and iPad lines due to cost pressures from rising memory chip prices, and Meta is considering offering some of its excess AI computing power and model access to external clients.
This series of negative narratives has altered the previously optimistic market expectations for AI computing demand and heightened concerns that high upstream prosperity in AI might negatively impact downstream demand. As a result, the global upstream AI supply chain has seen a widespread and significant correction since late June. The ChiNext Index, which has a high exposure to overseas AI supply chains, has experienced a relatively large recent decline. While the domestic semiconductor sector saw gains exceeding 30% in June, it has recently undergone profit-taking adjustments influenced by the changing AI narrative.
Furthermore, recurring overseas geopolitical risks are also suppressing risk appetite.
From the perspective of the A-share market itself, there are also microstructural issues. By late June, A-shares had once again shown signs of overheated trading sentiment, with daily turnover of 3.8 trillion yuan corresponding to a turnover rate exceeding 6%. Observations indicate that the tech sector in A-shares suffers from excessively high trading concentration. Last Thursday and Friday, the TMT sector's share of A-share trading volume rapidly rose to a historical high of 52%, with the semiconductor industry's trading share also reaching 20%. Conversely, non-AI sectors faced significant selling pressure and notable corrections.
From a liquidity standpoint, trading-oriented capital began to show a marked decline starting last week.
According to a strategy chief, margin financing capital recorded a net outflow of 57.9 billion yuan last week, with trading activity falling to its lowest level since mid-April 2026. Net inflows from top-performing trader lists also narrowed simultaneously. ETFs were the primary source of incremental capital last week, with stock ETFs seeing a net subscription of 50.3 billion units and a net capital inflow of 57 billion yuan—the highest net inflow since mid-April 2025. The CSI 1000, STAR 50, and ChiNext indices led in terms of inflows.
Regarding leveraged funds, margin financing capital saw a net outflow of 57.9 billion yuan last week. The activity rate of margin financing transactions fell to 9.20%, and the market average collateral ratio declined sequentially to 282%. Structurally, margin financing capital saw net inflows only in the communications, agriculture/forestry/livestock/fishing, and consumer services sectors, with major net outflows from electronics, basic chemicals, non-ferrous metals, and machinery.
In his view, capital is contracting within the tech sector itself, with margin financing funds net selling electronics while slightly buying communications. Hot money primarily bought into software directions like computers, but various types of capital have not yet reached a consensus.
Heightened Volatility and the Focus on Fundamentals
Despite the short-term correction, the industry still sees positive factors.
The market's recent correction has been relatively deep and widespread. The retracement of the Shanghai Composite Index since mid-May has nearly matched the adjustment triggered by U.S.-Iran tensions in March, raising concerns among many investors about the medium-term performance of A-shares. Comparatively, the current short-term market correction may have already reflected excessively pessimistic expectations, and a rebound could arrive at any time within the next 1-2 weeks.
Research from a leading investment bank suggests the second quarter may represent the extreme point of China's K-shaped divergence. In the second half of the year, the fundamentals of the AI sector and traditional sectors may begin to converge, though the pace and slope remain to be observed. As the fundamentals of the non-AI economic sectors in China and the U.S. have not changed significantly, as long as the AI industry trend remains clear, AI and technology may still be the medium-to-long-term market theme. However, considering that expectations, valuations, and positioning concentration for both Chinese and U.S. tech stocks are currently high, short-term volatility may increase. Therefore, while maintaining allocations to AI assets, the necessity of increasing allocations to liquidity-sensitive assets (such as gold and non-ferrous metals) may be rising.
Simultaneously, the bank is relatively optimistic about the liquidity environment. It anticipates that entering July-August, as U.S. inflation and growth data moderate, or if new policy guidance is provided, the Federal Reserve's tightening narrative could reverse rapidly. The turning point for global liquidity easing may be drawing closer. An improvement in global liquidity is also expected to continue supporting both Chinese and overseas stock markets, especially the AI and tech growth sectors, and the bank maintains an overweight position on Chinese equities.
In the view of another strategist, the era of synchronized rises in various financial assets driven by the Federal Reserve's massive balance sheet expansion in 2020 may be a thing of the past. The slowdown in global financial expansion means competition for existing liquidity among global assets will become more intense, which has amplified the volatility caused by overseas trading desk deleveraging over the past two weeks.
The direction of fundamentals is the ultimate gauge for whether the tech rally has peaked. Drawing on historical patterns, this round of tech stock adjustment is seen as more similar to the mobile internet correction in June 2015, the core asset correction in February 2021, and the new energy correction in November 2021. Trading volatility triggered the first round of market adjustment, but there was little fundamental evidence at the time; rebounds occurred after the trading volatility subsided.
Differing slightly from the 1-2 week rebound expectation, this strategist anticipates a tech stock rebound may require 1-2 months. The current fundamentals of the AI industry are relatively solid, with token prices and usage stabilizing and rebounding over the past week, suggesting a potential rebound within 1-2 months. However, the strategist also cautions that if signs emerge of slowing token consumption and semiconductor shipment growth rates, it would signal characteristics of a stagflation phase in this tech investment cycle, validating the logic behind the decline.
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