JPMorgan: AI entry point improves after correction, while shareholder-return strategies can balance China equity volatility

Overview

This report discusses the rebalancing of the China equity market following the correction in technology stocks. JPMorgan believes that A-share margin-financing deleveraging has passed its most acute phase; the market may continue to consolidate in the short term, but there is no clear sign of an imminent loss of control. The report also emphasizes that the entry point for AI has improved after the correction, while shareholder returns, high-dividend buybacks, and quality non-AI sectors can provide portfolio balance.

Core views

The core views are: first, A-share margin balances fell from approximately Rmb3.0trn on June 23 to around Rmb2.70trn on July 20, while margin purchases as a share of trading volume fell below 9%, indicating easing leverage pressure; second, National Team funds have provided support but have not yet constituted a clear bottoming signal; third, tighter regulation of quantitative funds may affect market sentiment, but mainstream medium-frequency multifactor, enhanced-index, and quantitative stock-selection strategies may not suffer material damage; fourth, policy is more likely to accelerate the implementation of existing budgets rather than immediately introduce large-scale new stimulus; and fifth, supported by earnings growth and policy, the AI ecosystem may reestablish market leadership in the second half of 3Q and in 4Q.

Analysis framework

The report combines margin balances, margin purchases as a share of A-share trading volume, A-share turnover velocity, ETF fund flows, potential forced-liquidation pressure from pledged shares, IPO and refinancing pipelines, policy-meeting expectations, sector momentum models, and earnings-growth expectations to form a top-down view on China equities. It also uses high-dividend and buyback screening and a sector-momentum tracker to identify defensive and offensive allocation opportunities.

Methodology notes

• Technical and sector rotationA-share sector momentum tracker

  Composite technical score from 0 to 100

  The model ranks A-share sectors based on five quantitative variables: 20-day total return represents medium-term momentum; changes in trading value and price-volume confirmation represent turnover validation; the arrangement of the 5/10/20-day moving averages represents trend structure; excess returns relative to the broader market represent relative performance; and the proportion of rising constituent stocks within a sector represents breadth. Scores of 80-100 indicate the leadership range, 60-79 the constructive range, 40-59 the neutral or transitional range, and 0-39 the lagging range.

Asset mapping & comparison

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

• China equities overall

  Core allocation asset

  Strengths

  Liquidity conditions are broadly supportive, earnings-growth expectations remain positive, and policy priorities center on AI infrastructure, advanced manufacturing, and self-reliance.

  Weaknesses

  Near-term market velocity remains elevated, National Team buying has not yet provided a clear bottoming signal, and external uncertainties and local-government constraints remain.

  Comparison

  The report maintains OW on China equities within EM/Asia allocations.

  Risks

  If 3Q growth momentum weakens, fiscal implementation falls short of expectations, or deleveraging pressures recur, the index could move toward the bear-case targets.

• China AI ecosystem

  Offensive direction

  Strengths

  Policy supports AI infrastructure and high-tech manufacturing; the 2Q earnings season may reinforce AI's leading position in EPS growth, while the technical backdrop has improved following a significant reset.

  Weaknesses

  Rotation from AI to non-AI has taken place over the past month, and momentum scores for AI-related sectors have fallen to year-to-date lows.

  Comparison

  The report views the recent correction as healthy rotation rather than the end of the AI cycle.

  Risks

  If earnings delivery is weaker than expected or regulation and external restrictions affect the supply chain, an AI-theme rebound may be delayed.

• High-dividend and buyback stocks

  Defensive and downside hedge

  Strengths

  Companies with high dividends, buyback yields, net cash, and positive operating cash flow may benefit from renewed policy emphasis on shareholder returns.

  Weaknesses

  If risk appetite shifts rapidly toward high-beta growth stocks, defensive income strategies may underperform relatively.

  Comparison

  Provides portfolio balance against the offensive AI direction.

  Risks

  Lower-than-expected dividend or buyback execution, or deterioration in cash flow, would weaken the strategy's effectiveness.

• Selected non-AI stocks

  Rotation beneficiary

  Strengths

  The report notes that leadership has broadened into cyclical sectors, food and beverage, and high-yield sectors, with market breadth improving.

  Weaknesses

  The relative performance of non-AI sectors may depend on the persistence of rotation and fund rebalancing.

  Comparison

  The report's preferred non-AI names include Bank of China-H, CICC-H, Innovent, BYD-H, and CR Land.

  Risks

  If AI quickly regains market leadership, non-AI sectors may temporarily underperform.

Key data

• Peak A-share margin balanceApproximately Rmb3.0trnReached a peak on June 23, marking the first time in A-share history that it exceeded Rmb3trn.
• Decline in margin balanceApproximately Rmb300bnDeclined for 13 consecutive trading days from July 2 to July 20, reaching approximately Rmb2.70trn.
• Margin purchases as a share of A-share trading volumeBelow 9%Indicates that the most aggressive forced-deleveraging pressure has been released to a significant extent.
• A-share turnover velocityApproximately 4-5%Still above the approximately 3-3.5% lows commonly seen during stages of bull markets, implying that consolidation may continue in the short term.
• Single-day National Team ETF inflowsUp to approximately Rmb30bnBelow the approximately Rmb100bn single-day net inflow on April 8, 2025, and insufficient to confirm a durable bottom.
• 14-day RSI for CSI300/STAR5041/38As of July 29, down significantly from 63/75 at the end of June.
• Potential forced-liquidation pressure from pledged sharesNo more than Rmb100bn in market capitalization for every 5% declineApproximately 5% of daily A-share trading value; the report believes further liquidity risks are manageable.
• AUM of quantitative public fundsApproximately Rmb0.5trnAs of 1H26, representing year-on-year growth of 77%.
• Estimated AUM of quantitative private fundsApproximately Rmb1.8-2.5trnSourced from the China Securities Journal market estimate cited in the report.
• Sector composition of the A-share IPO pipelineIT 39%; Industrials 23%; Health Care 12%Indicates that the capital market continues to serve financing needs in strategic emerging industries.
• End-2026 index targetsMXCN 100; CSI-300 5,200Bear-case targets are 80 and 4,000, respectively.
• Consensus EPS growthMXCN 13%; CSI-300 24%Used to support the report's views on index targets and China equity allocations.

Impact & implications

For portfolios, the report recommends not viewing the AI correction simply as the end of the theme, but instead focusing on the improved entry point following the correction. Meanwhile, against a backdrop of insufficiently strong bottoming signals and the need to balance IPO supply with demand, stocks with high dividends, buybacks, and strong cash-flow quality can serve as risk buffers. If policy implementation accelerates and 2Q results validate AI earnings growth, the AI supply chain and domestic-substitution themes may once again become the market's main drivers.

Risks

• A-share turnover velocity remains at 4-5% in the short term, and consolidation may continue.
• National Team ETF inflows have not yet reached levels that historically constituted a clear bottoming signal.
• Tighter regulation of quantitative trading may affect small-cap liquidity and market sentiment.
• An imbalance between IPO and refinancing supply and demand could suppress risk appetite.
• 3Q economic growth momentum, the pace of fiscal implementation, and external uncertainties may affect further policy easing.

What to watch

• Whether A-share margin balances and margin purchases as a share of trading volume remain stable at low levels.
• Whether A-share turnover velocity falls toward the approximately 3-3.5% stage-low range.
• Whether ETFs, particularly Huijin-related ETFs, record single-day net inflows approaching or exceeding historical strong-buying signals.
• The pace of implementation of existing budgets, project approvals, bond issuance, and fund disbursement following the July Politburo meeting.
• Whether 2Q results from the AI supply chain validate leading EPS growth.
• Whether high-dividend, buyback, and low-beta stocks continue to receive policy and fund-flow support.