A-share tech crowding at 92% percentile as style rotation nears equilibrium

A record 2.92 trillion yuan in margin financing and extreme tech-sector crowding are pushing China's A-share market toward a style rebalancing, with the mid-year earnings season set to determine whether growth stocks can sustain their dominance.

"Current tech-sector trading concentration has reached levels that historically precede a period of style convergence," China Merchants Securities strategists wrote in a June 4 report. "But this does not signal the end of the growth cycle — the AI industry trend remains intact."

Margin debt stood at 2.92 trillion yuan as of May 28, equivalent to 2.79 percent of A-share free-float market capitalization and placing it at the 92.55th historical percentile, according to exchange data. ETF net outflows widened to 322 billion yuan in May from 261.6 billion yuan in April, even as new margin inflows of 225.1 billion yuan partially offset the drain. The CSI 300 and Shanghai Composite have seen capital rotate aggressively into semiconductor, CPO and AI hardware names while insurance, banking and consumer stocks slumped on June 18.

The rebalancing carries high stakes for the 2.92 trillion yuan in leveraged positions. If tech earnings disappoint during the late-June reporting season, forced deleveraging could magnify downside in the most crowded names. Conversely, if traditional sectors show earnings improvement, the rotation could accelerate, reshaping the market's leadership for the second half.

China's producer price index returned to positive territory in March, a shift that historically favors small-cap value stocks. But unlike prior cycles, the presence of a clear AI-driven growth narrative means the market is more likely to sustain a dual-track structure — with PPI-sensitive value stocks and AI-linked growth names running in parallel — rather than a wholesale rotation out of technology, the China Merchants Securities team said.

Margin Debt at 92% Historical Percentile Raises Deleveraging Risk

The margin financing balance of 2.92 trillion yuan represents one of the highest leverage readings in A-share history. At the 92.55th percentile of all observations since 2010, the market is vulnerable to a shock that triggers forced position unwinding. The 322 billion yuan in May ETF outflows suggest institutional investors are already reducing exposure, even as retail margin buyers continue to add. If risk appetite falters, the inflow of new margin money — which totaled 225.1 billion yuan in May — could slow sharply, removing a key support for crowded tech trades.

Mid-Year Earnings Become the Decisive Test

The late-June mid-year report season will serve as the critical test for both sides of the rotation trade. For tech stocks, the earnings season will validate whether the AI-driven revenue growth that powered the rally through April and May can continue. For traditional sectors — insurance, banking, consumer staples — it offers a chance to demonstrate a fundamental turnaround. "The earnings delivery will determine where capital flows next," the China Merchants Securities strategists said. "This is the observation window for both growth and value."

This article is for informational purposes only and does not constitute investment advice.