(Yicai) July 21 -- The selloff in Chinese mainland stocks is a technical correction caused by profit-taking and the unwinding of crowded trades following overseas market concerns around artificial intelligence, not a deterioration in underlying fundamentals, and does not change the bullish outlook for A-shares longer term, according to the chief economist at Yuekai Securities.

“The increase in negative factors overseas is the direct trigger for this round of adjustment in the mainland stock market,” Luo Zhiheng, who also heads the Guangzhou-based brokerage’s research institute, told Yicai today.

He noted that the overseas AI sector is rife with negative narratives. Reports that Meta was considering to lease out idle computing capacity fueled AI overcapacity fears, while investors questioned whether the capital expenditure-driven "burn cash for growth" business model was sustainable, triggering a selloff in hardware stocks such as memory chips and semiconductors.

At the same time, resurgent geopolitical risks have led to a marginal tightening of overseas liquidity, weakened risk appetite, and transmitted overseas market volatility to the Chinese mainland market, Luo said.

The Shanghai Composite Index fell to its lowest level this year on July 17, while the ChiNext and Star 50 indexes each tumbled over 7 percent in a single session. China's "national team" of state-backed investment funds subsequently poured about CNY60 billion (USD8.9 billion) into publicly traded state-owned enterprises to help steady the market. Listed businesses, insurance funds, and securities houses have also announced shareholding increases, buybacks, and dividend payments.

According to Luo, the sharp correction in A-shares reflected crowded positioning in technology stocks, where investors had accumulated sizable unrealized profits. He said the recent decline represented a rebalancing of market positions rather than a change in underlying fundamentals.

China's major stock markets rebounded today.

The meeting of the Politburo, the Communist Party's top decision-making body, scheduled for later this month could move to speed up the rollout of previously announced policies and introduce additional supportive measures, Luo noted. That should help ensure a smooth start to China's 15th Five-Year Plan, covering this year through 2030, and support another round of stock market gains, he added.

Luo also pointed out that the AI industry’s development trend remains intact, with sector fundamentals continuing to improve. Meanwhile, regulators have put out positive signals and state-backed market stabilization funds are helping provide a floor for valuations, steadying expectations and nerves, he noted.

Editor: Emmi Laine