Is China Really to Blame for the Chip-Driven Tech Wreck?
Semiconductor stocks are selling off hard, a scary picture in a key week for earnings. But is the ‘China factor’ really to blame?
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Is China driving the chip story right now?
The chip selloff is steepening Tuesday in this key week of tech-sector earnings, with the sector well into bear-market territory.
There’s a lot of casting around for answers as to why — and most of the fingers are pointing in China’s direction.
Earnings to Land in Korea
In Asia, we have SK Hynix (SKHY) (KR:000660) reporting earnings Wednesday, followed by Samsung Electronics (KR:005930) Thursday.
Both stocks are getting pounded Tuesday. Hynix is down 14.7% in Asian trade, taking its losses since its June 22 high to 46.9%. Samsung is following a similar pattern, down 13.4% for a 39.3% loss since its all-time closing high on June 18.
That led the benchmark Kospi in Seoul to close down 10.8% Tuesday, one of its worst days on record and its largest fall since March 4. Circuit breakers kicked in to halt trade shortly after the open. The Korean benchmark is down 33.9% from its June 22 peak but still up 42.9% year to date.
It’s a tech wreck.
The U.S. shares of Hynix, at $130.58 as I write after Tuesday’s 8.7% move lower at the open, are now well below their initial public offering price of $149 on July 9.
Is competition from China the reason? I’m not so sure. Hyperscalers and the chipmakers that make their chips are both selling down heavily, and analysts cite a new factor every day.
The “normal” pattern has been that hyperscaler capex boosts the semiconductor sector. The likes of Amazon.com (AMZN), Google parent Alphabet (GOOGL), Meta Platforms (META) and Microsoft (MSFT) are buying chips as fast as they’re made — and supply looks set to remain exceptionally tight through at least 2030.
To add to the import of this week for the tech sector, we’ll have Meta and Microsoft reporting Wednesday as well as Amazon and Apple (AAPL) Thursday.
Over the weekend, Samsung secured a $200 billion deal to supply memory to Broadcom (AVGO), while SK Hynix inked a $500 billion deal with Nvidia (NVDA) and another $250 billion to other customers. Again, the semiconductor stocks sold off despite this positive news.
Chinese Competition on DUV?
Tuesday, one of the reasons given is that a Chinese company is starting to make deep-ultraviolet (DUV) lithography machines. The Information initially had the story but didn’t name the company. Reuters is now identifying a little-known Chinese state-owned company, Shanghai Aishenga Electronic Technology Group, as the “culprit.”
That would be a problem for the world’s leading maker of DUV machinery, the Dutch company ASML Holding (ASML). But what’s this? The Chinese company will be making five machines this year, if it’s lucky, and maybe 20 next year? And they will be sold to Chinese chipmakers?
It doesn’t explain the broad selloff in the semiconductor sector. At best, it would be a company-specific problem for ASML, and maybe its competitors in DUV tech, Nikon (NINOY) (T:7731) and Canon (CAJPY) (T:7751), which are diversified enough as electronics makers not to rely on those machines as their major profit center.
CXMT Shoots to the Top in China
We’ve also had a blockbuster initial public offering (IPO) in China, chipmaker CXMT rising from obscurity to become mainland China’s largest listed company. It was founded 10 years ago.
Monday’s IPO, raising C¥66.6 billion ($9.8 billion) for the company, is the largest in Asia so far this year. But it’s also hardly a surprise. I flagged well ahead of the event that ChangXin Memory Technologies — better known as CXMT — would be listing on the STAR Market in Shanghai.
The stock shot up 466% on debut, to become China’s largest company by market capitalization. There’s been a slender 4.1% adjustment Tuesday, but its $491.6 billion valuation means it is similar in size to Mastercard (MA) and slightly larger than Cisco Systems (CSCO).
You’ve gotta say there’s been woeful underwriting of the offer if it was mispriced so low. The company has left billions on the table compared with its $85.5 billion valuation at the IPO price.
Bigger than the Banks
Its debut also pushes it past the bank ICBC (IDCBY) (HK:1398) (SH:601939), which was previously the largest mainland listing, with a market cap of $428 billion. I should note that Tencent Holdings (TCEHY) (HK:0700) remains the largest listed Chinese company, with a market cap of $514.9 billion, but it is listed offshore in Hong Kong, and doesn’t trade on the mainland markets in Shanghai and Shenzhen.
China also reported industrial-profit data this week. While overall industrial profits decelerated to 15.1% for June, down from 21.1% in May, Chinese integrated-circuit manufacturers saw profits leap almost 2,580%. The electronics sector as a whole saw earnings up almost 97% over the first half of last year.
I don’t think we are seeing a “DeepSeek moment” for chipmakers, akin to the sudden shock in January 2025 when DeepSeek unveiled a low-cost Artificial Intelligence model trained for a fraction of the cost of OpenAI’s ChatGPT. Actually, even the DeepSeek moment hasn’t lasted, since it’s likely the Chinese models were trained on their U.S. rivals.
We hear now that DeepSeek has just paused its second fundraising round after private comments by founder Liang Wenfeng leaked online. Liang is complaining that China still lags the United States on tech-sector funding and computing infrastructure, if not raw human talent. Liang also acknowledged that DeepSeek remains dependent on top-flight AI hardware from the likes of Nvidia.
China Carving Out Its Own Sector
In other words, China hasn’t caught up to the top chipmakers from the United States, Japan, South Korea and Taiwan. What we are seeing instead is a bifurcation of the semiconductor sector, with China doing its damnedest to become self-sufficient. That’s a forced move due to restrictions on tech-sector sales to China.
I noted as much on Tuesday’s Money Talk podcast with Peter Lewis, where we break down all today’s market-moving news in Asia. You can find the Spotify link to the show here, and Peter has a very handy free daily newsletter that’s a great summary of what’s going on around the word, with an Asia focus. You can find that with today’s show at his Substack here.
The new DUV machines will supply Chinese chipmakers such as CXMT, as well as China’s largest chip foundries, Semiconductor Manufacturing International Corp. or SMIC (HK:0981), and Hua Hong Grace Semiconductor (HK:1347).
Chinese chipmakers are not totally spared Tuesday’s selldown. Hua Hong Grace is off 6.9% for Tuesday, and SMIC moved 2.2% lower.
Unwinding of Crowded Trade
What we are seeing instead is a massive unwinding of leverage in a very crowded trade. Over-borrowed investors into the chip sector are being forced to sell whether they want to or not.
We are also surely seeing de-risking ahead of the U.S. Federal Reserve decision on interest rates Wednesday. Markets are pricing in a 35.4% chance of a rate hike, the decision more in the balance than normal since new Fed Chair Kevin Warsh is being less communicative than his predecessors.
And there was a lot of buying by fund managers heading into the end of Q2, window dressing before the end of the first half of the year. That’s now being undone.
My efforts to trade in and out of the Roundhill Memory ETF (DRAM) around $60 have been way off the mark. It’s now trading at $47.30 after a 9.8% savaging Tuesday, taking it back to its levels of early May.
This week will be a scary one. We will also have earnings Wednesday from Qualcomm (QCOM) and Arm Holdings (ARM), and then Intel (INTC) reporting Thursday, with Tokyo-based Kioxia Holdings (KXIAY) (T:285A) delivering its earnings Friday.
What encourages me is that chipmaker earnings continue to be exceptionally strong. But even strong earnings are not enough. Samsung shares sold off three weeks ago when the company raised its sales and earnings forecast, a move I analyzed at the time.
Markets had factored in exceptional growth in chip-sector sales and profits. So I’m not sure what would change the momentum in the chip sector.
Strong semiconductor sector earnings? That’s what we expect — and there’s a selloff. Strong capital-expenditure plans by the hyperscalers? We expect that too — and stocks sell off because the plans look too ambitious, and there’s no sign of AI profitability. Lower levels capex spending by hyperscalers? That would prompt a selloff, too, hinting at slowing demand for chips.
We could see some rebound in the semiconductor sector should the Fed meeting pass with a pause, as expected. But for now, the selling is savage despite record earnings and growth, and shows no sign of stalling.
At the time of publication, McMillan was long DRAM, MSFT and AAPL.
