JP Morgan backs A-share AI stocks after 12% margin ratio drop

The recent correction in A-share AI stocks represents a healthy deleveraging rather than a structural bubble burst, with IT sector margin trading already falling from a 12 percent peak to 8 percent to 9 percent of total turnover, according to JP Morgan.

"The deleveraging process is largely complete, and the fundamental thesis for China's AI ecosystem remains intact," Zhang Xiaoning, China equity strategy analyst at JP Morgan, said in a July 15 report.

Semiconductor ETF inflows turned positive in early July, averaging CNY 1.2 billion daily from July 1 to July 13, while tech hardware ETFs saw daily net inflows of CNY 350 million. Chinese cloud hyperscalers — Tencent, Alibaba and Baidu — carry debt ratios of about 40 percent, far below the 100 percent average that Chinese developers reached during their 2021-2022 peak and the 230 percent leverage that U.S. telecoms Global Crossing and Level 3 Communications carried during the 2001 dot-com bust, the report said.

The report pushes back against "bubble burst" narratives at a time when global investors are reassessing China's AI opportunity. JP Morgan maintained its 2026 year-end targets of 100 points for the MSCI China Index and 5,200 points for the CSI 300, and said it expects China's AI ecosystem to reclaim market leadership during the August earnings season.

Hardware Bottlenecks Extend the Investment Horizon

JP Morgan identified global AI hardware supply constraints as a structural support for continued capital spending. TSMC's Arizona Fab 2 will not begin 3-nanometer mass production until the second half of 2027, while Micron is ramping HBM memory output at facilities in the U.S. and Singapore. SK Hynix's chief executive has warned that 2027 will bring the worst memory shortage in history, with meaningful HBM supply relief unlikely before 2028, the report said.

The supply bottleneck means that the next two quarters will not serve as a valid test of AI capex sustainability, according to JP Morgan. This dynamic strengthens pricing power and urgency for infrastructure investment rather than undermining it.

Balance Sheets vs. Historical Bubbles

The report compared current balance sheets of major AI players against two historical episodes of excessive leverage. Chinese cloud hyperscalers all carry investment-grade credit ratings ranging from BBB+ to A+, while their U.S. peers — Amazon, Alphabet, Microsoft and Meta — are rated between A+ and AAA. Although recent bond issuance has widened option-adjusted spreads for some companies, the overall financial structure bears no resemblance to the distressed balance sheets that preceded prior market crashes, JP Morgan said.

What Comes Next

JP Morgan expects near-term rotation from AI into non-AI sectors during July, driven by earnings catalysts in brokerages, insurance and health care. But the bank said China's AI ecosystem will reclaim leadership in August when second-quarter financial results and second-half guidance are released. The bank advised investors to hold quality AI large-caps through the current volatility.

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