China's Chip Index Has Fallen Almost Half

China's Chip Index Has Fallen Almost Half

China's chip heavy Star50 index has fallen as much as 48% from its late June peak, dropping from around 2,180 to below 1,200 by early November.

The fall did not start with bad news. Traders point to no single trigger. The more concrete factors are stretched valuations, tax considerations around taking profits, and the prospect of tighter US export restrictions. Regulators were simultaneously curbing leveraged and high frequency trading, and state backed investors sold into rallies to cool them.

The number usually skipped is the valuation. The index traded near 250 times earnings at its peak. After falling almost half, it still trades around 100 times. The decline has not made it cheap. It has moved it from extreme to expensive.

State money has arrived. About 128.7 billion yuan flowed into nine exchange traded funds actively traded by state backed investors in a single week, the most since April 2025, and a 60 billion yuan state backed artificial intelligence fund began deploying capital in October. Over the past decade China has had at least three equity routs that drew this kind of official support, in 2018, in 2024, and now.

That money can put a floor under the index, but it buys liquidity rather than value. After the previous two episodes the index stopped falling and then needed earnings to catch up before it recovered. American semiconductor shares fell hard in the same week, and both markets were repricing the same thing.

Source: Bloomberg, the Shanghai Stock Exchange and related market reporting (Image: @acemaxx)