China’s Technology Shares Could Rebound, but Earnings Must Validate the Recovery

July’s sell-off was severe enough to challenge the idea that China’s technology sector merely experienced ordinary volatility. Investors had built large positions in companies associated with AI servers, optical communications, data centres and semiconductors after a powerful earlier rally. When doubts emerged about the sustainability of global AI capital expenditure and traders began securing profits, these crowded positions reversed rapidly. The CSI 300 lost roughly 8% in July, while the Star Market 50 suffered a record monthly decline of about 26%. Outstanding margin-financed share purchases fell from a record 3.01 trillion yuan on June 25 to approximately 2.59 trillion yuan at the end of July. That 14% contraction demonstrates that forced position reduction was part of the downturn, although the pressure was concentrated primarily in high-valuation technology segments rather than across the entire financial system.

CITIC Securities argues that the decline should be interpreted as a correction after excessive buying rather than the type of systemic deleveraging shock that struck South Korea. The distinction is partly based on market structure. South Korea’s Kospi lost 22% in July because Samsung Electronics, SK Hynix and other semiconductor companies have an unusually large influence on the index, while heavy foreign participation made the market vulnerable to rapid cross-border withdrawals. China’s A-share market has a wider industry composition, a larger domestic investor base and more direct support from state-linked institutions. CITIC believes selling pressure has already eased among companies outside the most crowded AI trades, while Huatai Securities sees the possibility of a technology-market floor forming before a more meaningful rebound later in August.

China’s domestic semiconductor strategy provides a fundamental argument for recovery. The country continues to direct public and private capital toward chip design, memory, fabrication equipment and AI infrastructure as US export controls increase the importance of local supply chains. The July listing of memory-chip manufacturer CXMT demonstrated the scale of investor interest: the company raised 57.92 billion yuan, or about US$8.6 billion, in the largest mainland semiconductor offering on record, and its shares rose 466% on their first trading day. CXMT’s expansion reflects genuine growth in AI-related memory demand and China’s determination to reduce dependence on foreign suppliers. However, the listing also revealed speculative risk. Only a small percentage of its enlarged share capital was freely tradable, contributing to extreme price movements, while its multitrillion-yuan valuation moved far ahead of many established global competitors. The episode therefore supports both the bullish case for China’s chip industry and concerns that investor expectations remain excessively aggressive.

The next test will come from corporate results rather than brokerage forecasts. Chinese companies will publish interim earnings throughout August, giving investors clearer evidence about orders, margins, inventories and cash flow across the AI supply chain. Nvidia’s results and spending guidance from major global cloud companies will also influence Chinese suppliers of optical modules, circuit boards, power equipment and server components. A durable rebound would require earnings forecasts to stabilise, margin financing to stop contracting and gains to broaden beyond a small group of strategic chip companies. Further reductions in global AI spending, disappointing domestic results, tighter US technology restrictions or excess memory capacity could trigger another round of selling. Chinese technology shares may therefore be approaching a tradable bottom, but the strongest opportunities are more likely to emerge in companies with demonstrable revenue and technological progress than through an indiscriminate sector-wide rally.