Shares in Chinese chipmakers fell on Thursday as the support of state funds that had briefly stabilized broader technology stocks earlier in the week failed to rein in a sector that analysts say has long been overvalued.
Among the worst hit, Hua Hong Grace Semiconductor fell 12.58%, Beijing YanDong Micro Electronic fell 10.55%, Ningbo Silicon Electronics fell 9.44% and Shenzhen Intellifusion Technologies fell 9.42%. Semiconductor Manufacturing International Corporation (SMIC) also fell 2.95%.
State-backed funds, which had stepped in earlier this week to stabilize big-cap names like Tencent and Alibaba, showed their limits as chip stocks continued to fall.
The recent fall in Chinese stocks Following A global tech rout on July 16, when chip heavyweights including SanDisk (-11%), Seagate Technology (-10%), Nvidia (-2.30%), Intel (-5.84%), Advanced Micro Devices (-3.61%) and Micron (-4.60%) all closed in the red. Shares of Taiwan Semiconductor Manufacturing Company (TSMC) fell 7.29% on July 17, as the company’s third-quarter gross margin outlook of 65% to 67% missed market expectations of 70%, weighed down by rapid growth of its 2-nanometer process.
Some analysts of the global recession said investors were concerned about cost overruns in the development of artificial intelligence (AI) chips as the Kimi K3 AI model developed by China’s Moonshot could offer very competitive performance at a much lower cost than Anthropic’s Claude and OpenAI’s ChatGPT. Kimi K3’s recent debut also prompted US Treasury Secretary Scott Bessent to say on Tuesday that the United States will look into whether Chinese AI designs have been distilled from US designs.
The sale among Chinese chipmakers on July 17 coincided with the opening of the World AI Conference in Shanghai, where President Xi Jinping delivered a keynote speech about China’s strategy to encourage the development of open source AI models and their deployment in countries of the Global South. The decline spread to other sectors, dragging the Shanghai Composite Index down 3% on the same day.
“The July 17 decline helped investors identify custom chip makers from speculative stocks.” says Zhou Fan, a researcher at the Asia Fund Research. “Speculative stocks fell sharply as overall markets fell on fears of a burst AI bubble, while equipment suppliers and foundries were more resilient because their orders were already locked into procurement pipelines for the coming quarters.”
After the market crash on July 17, Beijing moved swiftly the following Monday, reportedly directing state funds to stabilize stock markets.
On July 20, Wu Qing, chairman of the China Securities Regulatory Commission (CSRC), VISIT a broker in Beijing and met with a group of retail investors. The CSRC described the session as part of a wider series of forums on market stabilization, with similar meetings planned for listed companies, securities firms and fund managers.
At the same time, two large sovereign wealth funds announced their moves to buy shares. China Reform Holdings said its investment arm had deployed more than 50 billion yuan ($6.9 billion) from a special government lending facility to buy shares and would continue to use policy tools. China Chengtong Holdings said its subsidiaries had bought nearly 10 billion yuan of domestic stocks and would continue to increase exposure to state-owned enterprises, quality technology stocks and related exchange-traded funds.
Listed companies also embarked on share buybacks, asset injections and dividend payouts in a coordinated push to bolster market confidence.
However, the impact of the rise in the sovereign wealth market lasted only two to three days, with many chipmakers seeing their shares fall again on Thursday.
“Multiple negative factors have combined to drive this consecutive selloff in the chip sector.” says a Shaanxi-based financial columnist who writes under the pen name Fengyun Caijin. “Investors holding positions should not rush to buy the dip, but look closely at trading volume and capital flows before making any decisions.”
He identifies three main triggers behind the decline:
- On July 16, South Korea’s central bank raised its key interest rate by 25 basis points to 2.75%, prompting margin calls globally and sending memory giants Samsung and SK Hynix up more than 10%. ChangXin Technology’s 57.9 billion yuan (US$8 billion) share offering on Shanghai’s STAR market prompted institutions to dump semiconductor stocks to raise subscription funds.
- On July 17, foreign capital fled after the minutes of the June meeting of the US Federal Reserve signaled a reduction in the balance sheet. Short sellers piled into Hong Kong-listed SMIC shares, pushing short trades to 16% of total volume and dragging down SMIC’s A shares by more than 6%.
- The third wave hit on July 21 and 22, as institutions used optimistic first-half earnings forecasts as an exit opportunity. Estimates on price-to-earnings (P/E) ratios of 200 times for some names tumbled as optimism for AI infrastructure spending cooled.
Has the AI bubble burst?
Some observers of the recent decline in Chinese stocks say it could be the start of a downward cycle, as most Chinese chipmakers have long been trading at inflated valuations. They say that’s why, while US-listed chipmakers have almost recouped their July 16 losses over the past week, their Chinese peers are still struggling to find a floor.
A technology analyst based in Shandong point as of mid-July, the combined market capitalization of the top 11 semiconductor companies in China’s A-share market was 7.37 trillion yuan, while their projected net profit for 2026 amounts to only 60.4 billion yuan, implying an average price-to-earnings ratio of 2 times (P/E) 2 times (P/E). It says artificial intelligence chip maker Moore Threads has a P/E ratio of 2,560 times, while Hua Hong Grace stands at 1,039 times, with other companies stacked between 50 and 300 times.
In contrast, major US and Taiwanese chip companies, buoyed by strong revenue growth, trade at much more realistic valuations. Nvidia’s trailing 12-month P/E ratio (TTM) stands at roughly 32.5 times, TSMC at 35 to 37 times, Qualcomm at 18.5 times, and Texas Instruments at 48.6 times.
Over the past two years, Chinese chip stocks have risen sharply, but their revenue and profitability have yet to catch up. Cambricon Technologies Corp shares gained 643% to 1,249 yuan from 168 yuan two years ago. SMIC rose 321% to HK$70.75 (US$9.1) from HK$16.8 over the same period.
“The reckoning of the Chinese chip sector was inevitable: Companies with real technology will eventually be separated from those that just go through the cycle.” says a stock investor using the pen name “Treasure Hunter”. “The era of buying every chip stock and waiting for a rally is over. Going forward, only those that can survive through cycles will command sustainable valuations.”
He says that with more companies flooding into the semiconductor space, investors will no longer follow the sector indiscriminately.
Read: US may sanction China’s Moonshot for distilling Anthropic’s Fable
Follow Jeff Pao at X at @jeffpao3
