Shares of Chinese chip makers tumbled on Thursday after state fund support that had briefly steadied broader tech stocks earlier in the week failed to hold back a sector that analysts say has long been overvalued.
Among the hardest hit, Hua Hong Grace Semiconductor plunged 12.58%, Beijing YanDong Micro Electronic fell 10.55%, Ningbo Silicon Electronics slid 9.44% and Shenzhen Intellifusion Technologies dropped 9.42%. Semiconductor Manufacturing International Corporation (SMIC) also slid 2.95%.
State-backed funds, which had stepped in earlier this week to stabilize large-cap names such as Tencent and Alibaba, showed their limits as chip stocks continued to slide.
The latest plunge in Chinese stocks followed 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. Taiwan Semiconductor Manufacturing Company (TSMC) shares fell 7.29% on July 17, after the company’s third-quarter gross margin outlook of 65% to 67% missed market expectations of 70%, weighed down by the rapid ramp-up of its 2-nanometer process.
Some analysts of the global downturn said investors were concerned about overspending in artificial intelligence (AI) chip development as the Kimi K3 AI model developed by China’s Moonshot could offer highly competitive performance at a much lower cost than Anthropic’s Claude and OpenAI’s ChatGPT. The recent debut of Kimi K3 also prompted US Treasury Secretary Scott Bessent to say on Tuesday that the United States will look into whether Chinese AI models have been distilled from US models.
The selloff among Chinese chip makers 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 Global South countries. The slump spread to other sectors, dragging the benchmark Shanghai Composite Index down 3% on the same day.
“The July 17 plunge helped investors identify chipmakers with manufacturing orders from speculative stocks,” says Zhou Fan, a researcher at Asia Fund Research. “Speculative stocks fell significantly when overall markets declined for fears of an AI bubble burst, while equipment suppliers and foundries were more resilient because their orders had already been locked into procurement pipelines for coming quarters.”
After the market crash on July 17, Beijing moved swiftly the following Monday, reportedly directing state funds to stabilize the stock markets.
On July 20, Wu Qing, chairman of the China Securities Regulatory Commission (CSRC), visited a Beijing brokerage and met with a group of retail investors. The CSRC described the session as part of a broader series of market stabilization forums, with similar meetings planned for listed companies, securities firms and fund managers.
At the same time, two major central state-owned funds announced their share purchase moves. China Reform Holdings said its investment arm had deployed more than 50 billion yuan (US$6.9 billion) from a special government relending facility to buy stocks and would continue to draw on the policy tools. China Chengtong Holdings said its subsidiaries had purchased nearly 10 billion yuan of domestic stocks and would keep adding exposure to state-owned enterprises, quality technology shares and related exchange-traded funds.
Listed companies also launched share buybacks, asset injections and dividend distributions in a coordinated push to shore up market confidence.
However, the impact of state funds’ market boost lasted only two to three days, with many chip makers seeing their shares down again on Thursday.
“Multiple negative factors have combined to drive this consecutive sell-off in the chip sector,” says a Shaanxi-based financial columnist writing under the pen name Fengyun Caijin. “Investors holding positions should not rush to buy the dip, but watch trading volume and capital flows closely before making any decision.”
He identifies three main triggers behind the slump:
- On July 16, South Korea’s central bank raised its benchmark interest rate by 25 basis points to 2.75%, triggering margin calls globally and sending memory giants Samsung and SK Hynix down more than 10%. ChangXin Technology’s 57.9 billion yuan (US$8 billion) share offering on Shanghai’s STAR Market also prompted institutions to dump semiconductor stocks to raise subscription funds.
- On July 17, foreign capital fled after the US Federal Reserve’s June meeting minutes signaled balance sheet reduction. Short-sellers piled into SMIC’s Hong Kong-listed shares, pushing short trades to 16% of total volume and dragging SMIC’s A-shares down more than 6%.
- The third wave hit on July 21 and 22, as institutions used upbeat first-half earnings previews as an exit opportunity. Valuations above price-to-earnings (P/E) ratios of 200 times for some names collapsed as optimism about AI infrastructure spending cooled.
AI bubble burst?
Some observers of the recent Chinese shares slump say it could be the beginning of a downward cycle, as most Chinese chip makers have long been trading at inflated valuations. They say this is why, as US-listed chip makers have almost recovered their losses July 16 losses over the past week, their Chinese peers are still struggling to find a floor.
A Shandong-based technology analyst points out that as of mid-July, the combined market capitalization of the top 11 semiconductor companies on China’s A-share market stood at 7.37 trillion yuan, while their projected net profit for 2026 totals only 60.4 billion yuan, implying an average price-to-earnings (P/E) ratio of 122 times. He says AI chip maker Moore Threads carries a P/E ratio of 2,560 times, while Hua Hong Grace stands at 1,039 times, with other companies clustered between 50 and 300 times.
By contrast, leading US and Taiwanese chip companies, backed by strong earnings growth, trade at far more realistic valuations. Nvidia’s trailing 12-month (TTM) P/E ratio stands at approximately 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 grown significantly but their revenue and profitability have not yet caught up. Shares of Cambricon Technologies Corp gained 643% to 1,249 yuan from 168 yuan two years ago. SMIC surged 321% to HK$70.75 (US$9.1) from HK$16.8 for the same period.
“The Chinese chip sector’s reckoning was inevitable: Companies with real technologies will eventually be separated from those simply riding the cycle,” says a stock investor using the pen name “Treasure Hunter.” “The era of buying any chip stock and expecting a surge is over. Going forward, only those that can survive through cycles will command lasting valuations.”
He says that with more companies flooding into the semiconductor space, investors will no longer chase the sector indiscriminately.
Read: US may sanction China’s Moonshot for distilling Anthropic’s Fable
Follow Jeff Pao on X at @jeffpao3
