A-share tech correction reaches 30% as margin ratio drops to 8.65%

China's A-share technology selloff has reached a magnitude typically seen only at the end of non-leveraged correction cycles, Sinolink Securities said.

The ChiNext index tumbled more than 10% last week while large-cap value gained 2.69%, as margin buying as a share of total turnover fell to 8.65%, the lowest level this year. Market volatility exceeded levels during the March US-Iran conflict and approached the April 2025 US-China trade friction episode, the brokerage's strategists said in a July 19 report.

"The current drawdown in AI-related sub-sectors has reached roughly 30%, comparable to the peak-to-trough corrections seen in 2007 cyclical stocks and 2021 core asset bubbles," the Sinolink strategists said.

The margin guarantee ratio stood at 272.65% as of July 16, leaving a potential buffer of 10% to 15% before forced liquidation thresholds are triggered. The electronic and communication sectors, which carry the heaviest margin positions, fell more than 8% on Friday alone. If those sectors decline another 10% to 15% without new collateral, a negative feedback loop similar to Korea's leverage-clearing mechanism could be triggered, the report warned.

The selloff reflects three overlapping investor concerns. First, AI-driven inflation is pushing downstream customers to resist further price increases, with some institutions already lowering their forecasts for memory price appreciation. Second, memory makers SK Hynix, Samsung Electronics and Micron Technology have all raised capex guidance for the next 24 months, pointing to future supply increases, while new competitors including BYD are reportedly considering entering the optical module supply chain. Third, US markets are rotating from semiconductor names into hyperscalers — the VanEck Semiconductor ETF dropped nearly 9% last week — echoing the HALO trade from late 2025.

Three paths for AI hardware

Sinolink outlined three potential scenarios for the AI hardware trade. In the first, the current concerns are disproven by a nonlinear technological breakthrough, making the correction a pure deleveraging event that could allow indices to surpass prior highs. In the second, the concerns prove valid, ushering in a prolonged fundamental-driven downturn. The third and most likely scenario, according to the report, is that AI-related investment has not yet slowed and the fundamental reversal signal is insufficient, meaning a structural rebound could follow once positioning adjusts.

The report draws parallels to two historical episodes: the 2007 cyclical stock peak, where the Li Keqiang index of aggregate demand had peaked five months earlier as price increases and monetary tightening eroded demand; and the 2021 new-energy stock peak, where net profit margins had been declining for four consecutive quarters as capital flooded in and worsened overcapacity risks. For the current cycle, the two key variables to watch are AI physical consumption volumes — token usage and semiconductor shipments — and cloud provider earnings, which the report says will matter more than hardware company results.

Defensive positioning recommended

Sinolink recommended maintaining a defensive posture until the fundamental trajectory becomes clear. The firm favors coal and power stocks as absolute-return plays benefiting from China's manufacturing flows, alongside oil and petrochemical names expected to benefit from valuation repair. Within AI, the report advises controlling position sizes and increasing exposure to semiconductor materials and equipment, which it describes as effective hedges during the "stagflation" phase of the investment cycle. For longer-term positioning, the report flags industrial metals, engineering machinery, grid equipment and refining as left-side opportunities tied to Southern Hemisphere and China manufacturing demand.

This article is for informational purposes only and does not constitute investment advice.