Chinese equities experienced a significant downturn on Friday, with major benchmark indices sliding to their lowest levels in three months. According to Reuters, concerns over a slowing Chinese economy, coupled with renewed conflict in the Middle East, weighed heavily on market sentiment despite stronger-than-expected June trade data. The Shanghai Composite Index declined 1.6% at the midday close, while the Shenzhen Stock Exchange Component Index dropped 3.7% to 13,953 points, showing deeper pressure in growth and technology-linked shares. The technology-focused STAR50 index had previously dropped 1%, and the start-up-focused CHINEXT index had slipped 1.7%, reflecting broad weakness in growth-oriented stocks.
Semiconductor shares were among the biggest drags on mainland markets, with the sector sub-index plunging 2.5%. The decline followed sharp losses among major Asian chipmakers, with South Korea's SK Hynix tumbling more than 12% and Samsung Electronics falling nearly 10% amid concerns over the technology sector outlook. As investors prepared to subscribe to the mega IPO, semiconductor, computer and big data stocks came under selling pressure. The defence sector dropped 5%, while rare earth stocks tumbled 5.6%. Technology stocks surrendered part of their recent gains, with the CSI AI Index retreating following its strong performance over recent months. Chipmakers and technology companies such as Cambricon Technologies, SMIC, Zhongji Innolight, Eoptolink Technology, and NAURA Technology were among the biggest losers, as investors turned cautious amid concerns that strong earnings growth may not be enough to support the sector's high valuations.
Hong Kong markets experienced a sharp decline on Friday, with the Hang Seng Index falling 2% by midday, dropping 494 points to 24,514. The selling was heavier in technology names, with the Hang Seng Tech Index slumping 4% to 4,638 points, showing pressure on internet, platform and other growth-linked shares. Market activity was strong during the selloff, with half-day turnover standing at HK$175.8 billion, pointing to heavy selling and active repositioning by investors. The decline followed weakness in global technology stocks, where investors have become more cautious over inflation risks, with higher inflation potentially making central banks more careful about cutting rates or forcing them to keep borrowing costs elevated for longer.
Market sentiment was significantly impacted by weaker economic data, which showed China's GDP grew at its slowest pace since the fourth quarter of 2022 and missed the government's 2026 growth target of 4.5% to 5.0%. In response to these disappointing figures, the People's Bank of China announced it would step up policy support in the second half of the year, with the flexibility to use measures such as reserve requirement ratio (RRR) cuts and reverse repos while keeping the seven-day reverse repo rate as its main policy benchmark. This policy response comes as markets had largely viewed recent weaker-than-expected second-quarter economic data as insufficient to trigger broad-based policy support, with Goldman Sachs economist Lisheng Wang expecting no policy rate or reserve requirement ratio cuts in China through the rest of 2026 under their baseline forecast.
The contrasting moves between mainland China and Hong Kong reflect shifting investor preferences, with concerns over technology valuations weighing on domestic markets while AI-related developments and corporate announcements continue to drive interest in select Hong Kong-listed technology companies. The policy response from the People's Bank of China, including the flexibility to use RRR cuts and reverse repos, suggests authorities are prepared to take more aggressive measures to support economic growth if conditions warrant it. However, markets have largely viewed recent weaker-than-expected second-quarter economic data as insufficient to trigger broad-based policy support, with the possibility of additional easing increasing if economic growth slows further. The latest decline comes after a period in which technology and AI-linked shares had drawn strong investor interest globally, but the rally has become more sensitive to inflation data, bond yields and expectations around central bank policy.
