Key Takeaways:
A-share tech stocks face continued pressure as trading-driven deleveraging has yet to run its course, with two key bottoming signals still absent.
The STAR 50 index fell more than 5% last week as A-share margin debt dropped over 30 billion yuan, pushing margin buying activity to its lowest level this year.
"Trading concentration in hot sectors and bullish sentiment both need to decline further before a durable bottom can form," analysts at Sinolink Securities wrote in a July 12 report.
The STAR 50's 5-day moving average volatility premium stood at minus 2.2%, still far from the minus 8% trough seen in prior deleveraging episodes. Options traders are pricing implied volatility below realized levels — an anomaly that signals reduced appetite for leveraged positioning. The TMT sector's share of total A-share turnover remains elevated, with communication and electronics stocks having recorded the highest margin-buy-to-turnover ratios over the past month.
The correction is trading-driven rather than fundamental, Sinolink said, noting that AI token usage and market-weighted prices are rising. Meta Platforms Inc.'s announcement of a C$13 billion data center investment in Canada has also helped ease concerns about overcapacity. The firm's AI physical consumption index continues to climb, and its downturn would be the signal for a sustained structural decline.
Three Signals Confirm Deleveraging Is Underway
Sinolink identified three indicators that characterize trading-driven deleveraging: a decline or sharp slowdown in margin debt growth, a rapid drop in margin buying activity, and options implied volatility falling below realized volatility. All three have now been triggered.
The A-share margin balance fell by more than 30 billion yuan last week, while the ratio of margin buying to total turnover dropped to a year-to-date low. In the options market, implied volatility on STAR 50 contracts slipped below the 20-day realized volatility — a pattern also visible in South Korea's KOSPI 200 options, where one-month implied volatility fell below the 30-day realized reading. Because options trading carries significant embedded leverage, a negative volatility premium is itself evidence of deleveraging.
History Shows Trading Corrections Can Deepen Before They End
Since the rally that began in September 2024, A-shares have experienced four prior deleveraging episodes: November 2024, March 2025, October to November 2025, and mid-June 2026. Each followed a period of sharp gains and coincided with amplified volatility.
The 2015 experience offers a cautionary parallel. Margin debt collapsed after regulators cracked down on off-balance-sheet financing, triggering an initial leg down in the mobile internet index. The index later rebounded, but a sustained decline began in late 2016 as revenue growth, gross margins and return on equity deteriorated. Similarly, the Ning组合 index fell in late 2021 alongside a margin debt decline, bounced in the second quarter of 2022, then entered a prolonged downturn as earnings growth weakened.
Fundamentals Remain the Key to the Next Phase
For now, the fundamental backdrop for AI-related tech stocks remains relatively stable. Large language model token usage and market-weighted prices have both recovered in recent weeks. Sinolink's AI physical consumption index — which tracks real-world demand for AI infrastructure — is still rising, and the firm said its inflection point will determine whether the current correction evolves into a structural downturn.
The two conditions needed to confirm a bottom — a meaningful decline in TMT trading concentration and a return of bullish sentiment to normal levels — have not yet been met, Sinolink said.
This article is for informational purposes only and does not constitute investment advice.
