China state funds buy after Shanghai Composite hits 2026 low

The Shanghai Composite fell 3% on July 17 to a new 2026 low, breaching the March trough, as a global chip rout and margin deleveraging triggered the worst drop since October.

"The market has priced in overly pessimistic expectations, and the second buying opportunity of the year may have arrived," strategists at CICC led by Liu Gang wrote in a note dated July 19, citing improving valuations and stabilizing fundamentals.

The ChiNext and STAR 50 indices each plunged more than 7%, with the STAR 50's monthly decline ranking as the largest in its history. The selloff erased over 4 trillion yuan ($590 billion) from the STAR Market from its July 1 peak, according to exchange data. Margin debt fell 172.5 billion yuan from its June high to 2.83 trillion yuan as of July 16, though the leverage ratio at 5.5% of free-float market cap remained half the 2015 peak. Daily trading turnover shrank to 2.65 trillion yuan, down about 300 billion yuan from the prior week.

The coordinated intervention by China Guoxin and China Chengtong — two of the country's largest state-owned investment platforms — shows Beijing's intent to defend the 3,800 level after the index broke below it. The CICC call adds institutional weight to the view that the selloff has overshot fundamentals, with the Shanghai Composite's forward P/E compressing to 13 times, near the March trough.

Global Chip Rout Compounds Local Pressure

The Shanghai selloff was part of a broader global technology rout triggered by the unveiling of Moonshot's free AI model Kimi K3, which demonstrated performance rivaling top-tier proprietary models from OpenAI and Anthropic. The Philadelphia Semiconductor Index has fallen 20% from its June 22 record high, entering a technical bear market, while Taiwan's TAIEX dropped 6.5% and Japan's Nikkei 225 fell 4% on July 17.

South Korea's Kospi, which was closed for a holiday on July 17, faces the burden of absorbing the accumulated headwinds when trading resumes on July 20. The index had already fallen to the 6,800 level last week, weighed by skepticism over the profitability of massive AI capital expenditures. SK Hynix's second-quarter earnings on July 24 are now seen as a critical inflection point for semiconductor stocks globally.

Valuation Support Emerges as Fundamentals Hold

Despite the rout, CICC's analysis shows the A-share market has multiple structural supports. The brokerage estimates 2026 full-year earnings growth of 6.3% for the broader market and 9.9% for non-financial companies, which would be the fastest since 2022. The TMT sector's share of total A-share trading volume has fallen to 47% from a record 52%, easing the crowding that worsened the selloff.

The CSI 300's forward P/E of 11.4 times compares with 21.5 times for the S&P 500, a valuation discount that has drawn attention from global allocators. The Shanghai Composite is now down 5.2% year-to-date, trailing all major global indices. The offshore yuan traded near 7.18 per dollar, while China's 10-year government bond yield held at 2.12%, reflecting expectations of further monetary easing.

CXMT Corp., China's top memory chipmaker, is set to debut on the STAR Market on July 27 in an $8.6 billion IPO that was 570 times oversubscribed by institutional investors — a test of whether demand for Chinese tech exposure survives the selloff.

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