CITIC sees A-share recovery in August after 10% correction

The Shanghai Composite's 10 percent drawdown is essentially complete, with CITIC projecting a broad August recovery as margin financing fell 14 percent from its peak.

"The adjustment was more a correction of crowded trades than a Korea-style deleveraging shock," CITIC Securities strategists wrote in a research note dated Aug. 2, citing stable margin collateral ratios and improving market breadth as evidence the bull market thesis remains intact.

Margin financing balances fell to 2.59 trillion yuan from a June 25 peak of 3.01 trillion yuan, a 14 percent decline that ranks as the mildest among comparable historical deleveraging episodes, which averaged 32 percent. The average collateral ratio stood at 264.5 percent as of July 30, down from 296.4 percent at end-June but still providing a comfortable safety cushion. Market breadth improved markedly, with 2,546 A-shares rising in July versus 1,419 in June, lifting the advance ratio from 25.7 percent to 46 percent. Non-tech stocks accounted for 2,291 of the gainers, or 50.6 percent, suggesting the correction was a rotation away from crowded AI trades rather than a broad market retreat.

The recovery is unlikely to be a simple oversold bounce, CITIC said. The firm recommends overweighting energy and chemicals, non-ferrous metals, non-bank financials, and innovative drugs, while advising investors to use any tech rebound to concentrate holdings in core assets such as optical communication leaders, wafer foundry platforms, and semiconductor equipment makers.

Margin deleveraging proves benign versus historical episodes

The 14 percent decline in margin balances compares favorably with prior stress events. The most severe episode was mid-2015, when margin balances fell 60 percent from peak to trough. Across global markets, comparable short-term corrections saw margin declines ranging from 14 percent to 60 percent, averaging 32 percent. The TMT sector's margin balance fell 20.2 percent from its high, exceeding the 13.2 percent decline in March-April 2022 and the 13.8 percent drop in early 2024, but remaining well below the 56.1 percent collapse in 2025.

ETF flows tell a similar story. From June 25 to July 30, tech-focused ETFs recorded net subscriptions of about 1,655 billion yuan, with 13 of 15 down days seeing net inflows totaling roughly 1,159 billion yuan. The largest single-day net subscription reached 236 billion yuan. This persistent buying suggests the correction was driven by institutional de-risking and crowded-trade unwinding rather than a disappearance of market demand.

The liquidity stress was concentrated in a narrow set of non-core AI stocks — names with high margin exposure, late-stage price appreciation, and limited institutional ownership. CITIC identified 37 such stocks, which averaged a 114 percent price gain in Q2 versus 49 percent in Q1, with much of the rally concentrated in April through June. Buyers who chased these names in May and June were sitting on average losses of about 34 percent as of July 31.

CITIC urges rotation into value sectors, core tech names

The August recovery is supported by improving macro conditions. The Federal Reserve's July meeting lacked hawkish measures, and weaker-than-expected U.S. Q2 GDP and June PCE data have further weakened the case for near-term rate hikes. The Politburo's late-July meeting adopted a more cautious tone on the economy, emphasizing the need for incremental policy support and stronger counter-cyclical adjustments.

The shift in expectations matters. In the first half, markets were continuously revising growth expectations downward. In the second half, markets will start from a more cautious baseline and wait for fiscal spending acceleration, monetary tool adjustments, and incremental policy implementation. This change in the direction of expectations should support a broadening of the rally beyond high-growth sectors.

Fund flows also favor non-AI sectors. A-share ETFs saw net redemptions of 1.63 trillion yuan in the first half, but July reversed the trend with net subscriptions of 4,784 billion yuan across 19 of 23 trading days, recovering about 29 percent of the first-half outflows. For non-tech sectors where active institutional positioning is already low, this passive ETF inflow provides more stable and balanced support.

CITIC maintains its "three convergences" thesis: excess returns of upstream hardware and price-increase names within the AI chain should converge toward downstream platforms and applications; the valuation discount of non-AI industrial sectors versus overseas peers should narrow; and the extreme divergence between tech and non-tech sectors should close. Within tech, the firm advises rotating from peripheral names into core holdings during any rebound.

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