AI Volatility Masks China's Growing Tech Strength

Please find below our latest thoughts on China:

• The reversal in technology stocks globally, amplified by the popularity of leveraged single-stock ETFs in South Korea, has also been reflected in onshore and offshore Chinese equities in recent weeks.
• The scale of the rotation has been notable and reflects how crowded AI-related positioning had become. Within the MSCI China All Shares Index, which spans both onshore and offshore markets, July saw a nearly 50% dispersion between the weakest-performing sector (technology, -26%) and the strongest-performing sector (consumer discretionary, +21%).¹
• This shift in market leadership also supported a recovery in offshore equities following an extended period of underperformance relative to the A-share market.
• In our view, however, this reflects a repositioning of investor flows rather than a change in the structural drivers that have supported equity performance over the past year.

• Indeed, recent developments continue to highlight the progress being made across the domestic technology ecosystem and suggest the gap with the US is continuing to narrow.
• The growing prominence of Moonshot AI and its Kimi models, alongside the use of a Chinese open-source model in responding to a recent OpenAI-related security incident (”Hugging Face”), highlights the increasing sophistication and competitiveness of the domestic AI ecosystem.
• Similar progress is evident in semiconductors. The widely followed IPO of ChangXin Memory Technologies (CXMT), one of the country's leading memory chip manufacturers, is a notable example.
• CXMT is the only major domestic producer of DRAM, the memory chips used in applications ranging from smartphones to AI data centres.
• Founded in 2016, it has already become the world's fourth-largest DRAM manufacturer² despite ongoing US export restrictions, underscoring the progress being made in building a more self-sufficient technology ecosystem.
• Yet the IPO also illustrates one of the market's near-term challenges. Its sheer size created liquidity pressures that exacerbated weakness elsewhere in the technology sector, with the USD8.6 billion offering attracting retail subscriptions of more than 200 times.³

• With flash-memory specialist Yangtze Memory Technologies (YMTC) also preparing for an IPO, this raises the question of whether a pick-up in equity issuance could continue to weigh on the A-share market.
• In our view, these concerns are overstated. Combined onshore and offshore IPO issuance remains around RMB 50 billion per month, well below the RMB 75-100 billion monthly peak observed during 2020-21. Secondary issuance has also moderated significantly, while buyback activity has increased.⁴
• As a result, we continue to view the demand-supply backdrop as more supportive than in previous years.
• Investor demand is also being underpinned by policy support. One notable development during July was the reemergence of China's so-called “national team” as a significant buyer of domestic equity ETFs.
• This represented the first sizeable intervention since the market volatility associated with the Liberation Day tariff disruptions in April and May 2025.
• Notably, the STAR 50 and ChiNext recorded higher net ETF inflows than during previous stabilisation efforts, signalling continued support for the technology sector.⁵
• More broadly, we view these purchases as a clear signal of policymakers' commitment to maintaining market stability and supporting investor confidence during periods of heightened volatility.
• Looking ahead, we remain constructive on the outlook for Chinese equities. While periods of market rotation and liquidity-driven volatility are likely to recur, we continue to see technology self-sufficiency, AI adoption, industrial upgrading and advanced manufacturing as important long-term growth drivers.
• Ultimately, earnings growth remains the key determinant of long-term equity returns, and we continue to see encouraging earnings momentum across a number of stocks and sectors aligned with these themes.
• As such, we view the recent weakness as primarily a valuation and positioning-driven correction and have been using the volatility to selectively add to preferred holdings at more attractive valuations.
• More broadly, we believe China's push for technology self-sufficiency, AI leadership and industrial upgrading is creating a durable foundation for future earnings growth, supporting a constructive long-term outlook for the market.

¹ Source: IDS GmbH as at 3 August 2025
² Source: Gavekal as at 29 July 2026
³ Source: Reuters as at 16 July 2026
⁴ Source: Gavekal as at 31 July 2026
⁵ Source: BNP Paribas as at 23 July 2026