A-share styles rebalance sharply; market becomes healthier after deleveraging and valuation pullback

Overview

This report reviews China’s equity market in July 2026 and macro data for June. The market saw a significant style shift in July: previously crowded artificial intelligence and high-valuation growth trades unwound rapidly, major broad-based A-share indices corrected sharply, while Hong Kong offshore Chinese internet stocks performed strongly, driven by short covering and policy optimism. Capital rotated into defensive and value sectors such as consumer staples, energy, and financials. The report argues that the share of margin trading and margin balances have declined notably, and the most difficult stage of deleveraging may have passed; meanwhile, the Politburo meeting emphasized fiscal execution and countercyclical support, providing some buffer for Chinese equity earnings. However, fixed asset investment, real estate, credit, and household demand remain weak, and the foundation of economic recovery is uneven.

Core views

First, the July correction was mainly driven by style and position rebalancing rather than a broad collapse in earnings expectations, with the unwinding of crowded artificial intelligence-related trades being the core reason A-shares significantly lagged Hong Kong stocks. Second, deleveraging has made substantial progress, with margin buying as a share of turnover approaching the cyclical lows seen in historical bull markets, and technical pressure on the market is expected to ease. Third, policy signals are marginally positive, with the recent focus on accelerating fiscal execution and strengthening countercyclical adjustment; although this is not yet large-scale stimulus, it helps buffer macro downside and corporate earnings risks. Fourth, CSI-300 valuations have returned to a more neutral range, and together with still-positive earnings growth expectations, medium-term risk-reward has improved. Fifth, the macro picture shows structural divergence: production is stronger than demand, high-tech is stronger than traditional industries, and external demand is stronger than domestic demand; trade can only cushion the slowdown and is unlikely to independently become a growth engine.

Analysis framework

The report uses cross-validation across market performance, sector rotation, leveraged funds, institutional allocation, consensus earnings expectations, valuation percentiles, and macro data. The market section compares broad-based A-share indices with major Hong Kong indices and decomposes sector returns; the funding section observes margin buying as a share of turnover and margin balances; the fundamentals section tracks earnings expectations for CSI-300 and MXCN; the valuation section uses 12-month forward P/E and its standard deviation relative to the historical median; the macro section covers industrial production, retail sales, fixed asset investment, real estate, credit, inflation, trade, foreign exchange reserves, the RMB exchange rate, and government bond yields.

Methodology notes

• Market style analysisCross-index and sector rotation comparison

  Identify changes in capital style through differences in monthly returns across broad-based indices, offshore indices, and sectors.

  The report compares CSI-300, CSI-500, and CSI-1000 with HSI and HSCEI, and combines the performance of consumer staples, energy, financials, information technology, materials, and industrials to determine that capital is rotating from high-valuation growth and artificial intelligence themes into defensive and value sectors.

• Market microstructureMargin deleveraging monitoring

  Measure the crowding of leveraged trading through margin buying as a share of turnover and changes in margin balances.

  Margin buying as a share of A-share turnover fell to 8.2%, and margin balances declined by about RMB300 billion from the interim peak. Based on this, the report judges that the most intense phase of forced or voluntary deleveraging may have passed.

• Valuation analysisHistorical standard deviation of 12-month forward P/E

  Compare the current 12-month forward P/E with the long-term historical median and fluctuation range.

  The CSI-300 traded at 13.2x 12-month forward P/E on July 31, equivalent to 0.6 standard deviations above the median since 2016, indicating that valuations remain slightly above the historical center but have clearly returned to neutral.

• Earnings analysisConsensus earnings growth and revisions

  Use market consensus expectations to judge whether future index earnings growth can support valuations.

  The report cites EPS growth expectations for MXCN and CSI-300 from 2026 to 2027 and tracks 12-month forward earnings revisions for CSI-300. The original text contains references to 19% and 24% earnings growth for CSI-300 in 2026, which may correspond to different statistical cutoffs or methodologies and should be checked against the original charts before use.

• Macro analysisProduction-demand-policy cross-validation

  Assess economic momentum and equity earnings risks by combining production, consumption, investment, credit, trade, and policy signals.

  Industrial and high-tech manufacturing improved, but retail sales, real estate, fixed asset investment, and new loans remain weak; fiscal execution and countercyclical support signals from the Politburo meeting are viewed as important variables for cushioning downside risks.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CSI-300

  Core observation target for A-share large caps

  Strengths

  Valuations have fallen back to a more neutral range, consensus earnings expectations still maintain positive growth, and it has a relatively high degree of direct policy support.

  Weaknesses

  It still fell 7.9% in July, and weak domestic demand and investment may suppress earnings delivery.

  Comparison

  The decline was smaller than those of CSI-500 and CSI-1000, but it significantly lagged HSI and HSCEI.

  Risks

  Downward revisions to earnings expectations, fiscal support falling short of expectations, and renewed contraction in margin trading.

• CSI-500 and CSI-1000

  A-share mid- and small-cap and high-beta risk appetite targets

  Strengths

  If liquidity improves and deleveraging ends, they may have relatively high rebound elasticity.

  Weaknesses

  They fell 17.0% and 19.7% in July, respectively, and are more sensitive to the unwinding of crowded trades, margin contraction, and declining risk appetite.

  Comparison

  Significantly underperformed CSI-300 and major Hong Kong indices.

  Risks

  Continued withdrawal of leveraged funds, high-valuation compression, and earnings pressure on small and medium-sized enterprises.

• HSI and HSCEI

  Proxies for the offshore China equity market

  Strengths

  Internet stocks were driven by short covering and policy optimism, performing significantly better than A-shares in July.

  Weaknesses

  The interim rally may be relatively dependent on position covering and sentiment improvement.

  Comparison

  They rose 13.1% and 13.9% in July, respectively, forming a clear divergence from major A-share indices.

  Risks

  Cooling policy expectations, the end of short covering, and volatility in external markets.

• Consumer staples, energy, and financials

  Main beneficiaries of defensive and value rotation

  Strengths

  They rose 11.5%, 11.1%, and 8.3% in July, respectively, with advantages from relatively low valuations, defensive attributes, or stable cash flows.

  Weaknesses

  If risk appetite recovers quickly, their relative returns may weaken; the consumer sector still faces weak domestic demand.

  Comparison

  Clearly outperformed information technology, materials, and industrials.

  Risks

  Further economic slowdown, falling commodity prices, net interest margin pressure, and a weaker-than-expected consumption recovery.

• Information technology and artificial intelligence-related sectors

  Main areas under pressure from the unwinding of crowded trades in this round

  Strengths

  High-tech manufacturing, equipment manufacturing, and some electronics export data remain strong, providing medium- to long-term fundamental support.

  Weaknesses

  Information technology fell 30.7% in July, and high valuations and crowded positioning make it highly sensitive to changes in risk appetite.

  Comparison

  Significantly underperformed defensive and value sectors, while materials and industrials with artificial intelligence exposure also weakened in tandem.

  Risks

  Continued valuation compression, earnings delivery falling short of expectations, weakening export demand, and trading crowding not yet fully digested.

• 10-year China government bond

  Interest rate observation target for domestic growth and policy expectations

  Strengths

  Weak economic and credit conditions support a low-yield environment.

  Weaknesses

  Yields are already at low levels, and further downside may be limited by policy and inflation changes.

  Comparison

  As of end-July, the yield was about 1.7%, reflecting still-weak growth momentum.

  Risks

  Stronger-than-expected fiscal expansion, rising inflation, or risk appetite recovery pushing yields upward.

• Renminbi

  Indicator of China macro expectations and cross-border capital sentiment

  Strengths

  Trade can still buffer the growth slowdown, with strong exports in high-tech, automobiles, and some consumer goods.

  Weaknesses

  Foreign exchange reserves fell by USD26 billion in June, while domestic demand, investment, and credit remain weak.

  Comparison

  The report shows USD/CNY falling to 6.75.

  Risks

  Weakening external demand, changes in capital flows, and interest rate differential pressure caused by policy easing.

Key data

• CSI-300 July return-7.9%Large-cap A-share index correction.
• CSI-500 July return-17.0%The decline in mid-cap stocks was significantly larger than that of CSI-300.
• CSI-1000 July return-19.7%Small-cap stocks faced stronger pressure from deleveraging and the unwinding of crowded trades.
• HSI and HSCEI July returns+13.1% / +13.9%The offshore market was driven by short covering and policy optimism, significantly outperforming A-shares.
• Consumer staples, energy, and financials July returns+11.5% / +11.1% / +8.3%Reflects capital rotation into defensive and value sectors.
• Information technology July return-30.7%The unwinding of crowded artificial intelligence trades and concerns over high valuations led the sector to underperform.
• Materials and industrials July returns-13.8% / -10.6%Related names with artificial intelligence exposure also came under clear pressure.
• Margin buying as a share of A-share turnover8.2%Already close to the cyclical lows seen in historical bull markets.
• Decline in margin balancesabout RMB300 billionThe scale of decline relative to the interim peak.
• CSI-300 12-month forward P/E13.2xAs of July 31, 2026, 0.6 standard deviations above the median since 2016.
• CSI-300 2026 consensus EPS growth19%Based on the valuation section methodology as of end-July; another part of the report lists 24%, so the statistical methodology should be checked against the original charts.
• Industrial production year-on-year growth5.3%In June, above May’s 4.5%, with high-tech and equipment manufacturing as the main supports.
• Retail sales of consumer goods year-on-year growth1.0%June turned positive from a 0.6% decline in May, but cumulative growth in the first half was only 1.3%.
• Fixed asset investment year-on-year growth-10.0%Investment remained the main drag on the economy in June, with a cumulative decline of 5.7% in the first half.
• Cumulative growth in real estate investment-18.0%As of the first half, real estate remained an important source of weak investment.
• New loans in JuneRMB1.61 trillionThe weakest June reading since 2021, with both corporate and household credit weak.
• Foreign exchange reservesUSD341.63 billionDecreased by USD26 billion in June.
• USD/CNY6.75The RMB exchange rate level shown in the report.
• 10-year China government bond yield1.7%As of end-July.

Impact & implications

For asset allocation, the valuation pullback and the late stage of deleveraging help reduce the probability of further disorderly adjustment in A-shares, but are not yet sufficient to confirm a broad reversal in risk appetite. In the short term, relatively favored areas may still be concentrated in defensive and value sectors with more stable cash flow, lower valuations, and lower policy sensitivity. Artificial intelligence and related high-valuation growth sectors may remain volatile before crowding is digested, but stronger fundamentals in high-tech manufacturing and export chains mean their long-term logic has not fully reversed. If fiscal execution and countercyclical support translate into improvements in domestic demand, credit, and earnings, A-share valuations are expected to receive more solid support; if investment and household demand continue to decline, earnings expectations may face downward revisions.

Risks

• Continued contraction in fixed asset investment, real estate investment, and private investment may drag on the economy and corporate earnings.
• The recovery in household consumption is limited, with automobile and housing-related consumption still weak.
• New loans and social financing growth are weak, indicating insufficient financing demand from enterprises and households.
• Crowded trades in artificial intelligence and high-valuation growth sectors may not yet have fully cleared.
• Policy signals are marginally positive, but large-scale stimulus has not yet formed, and actual fiscal execution and countercyclical support may fall short of market expectations.
• Export strength is relatively concentrated; external demand and high-tech exports can only cushion the slowdown and are unlikely to independently drive overall growth.
• Different sections of the report may use different methodologies for some earnings and trade data, so the original charts and statistical scope should be checked before use.
• Inflation transmission remains weak, and insufficient domestic absorption may continue to suppress corporate pricing power.

What to watch

• Whether the pace of fiscal fund deployment and the countercyclical support measures proposed at the Politburo meeting can be implemented.
• Whether A-share margin buying as a share of turnover stabilizes around 8.2%, and whether margin balances stop declining.
• Whether CSI-300 12-month forward earnings expectations and EPS forecasts for 2026 to 2027 continue to be revised downward.
• Whether the CSI-300 12-month forward P/E can stabilize around 13.2x.
• Position crowding and earnings delivery in artificial intelligence, information technology, materials, and industrials sectors.
• Whether consumption, real estate, manufacturing, and infrastructure investment can show sustained improvement.
• New loans to enterprises and households, social financing growth, and private sector financing demand.
• Whether the resilience of high-tech manufacturing, equipment manufacturing, and exports can spread to a broader range of industries.
• Changes in USD/CNY, foreign exchange reserves, and the 10-year China government bond yield.