Shares of China’s top chipmaker, SMIC, took a significant hit as investor concerns mount over the costs of keeping pace in the global semiconductor race.
Semiconductor Manufacturing International Corporation's Hong Kong-listed shares fell more than 4 percent on May 18, reflecting persistent investor anxiety over heavy capital expenditures and intense competition that threaten the chipmaker's profitability despite Beijing's policy support. The drop highlights the growing caution among investors navigating China's technology sector, where government backing doesn't guarantee success.
"Putting one’s money on market leaders has also not always worked," Manishi Raychaudhuri, founder of Emmer Capital Partners, said in a recent Reuters column, noting SMIC's year-to-date underperformance.
SMIC's stock was down over 5 percent for the year through mid-May, a period when smaller domestic rival Huahong Semiconductor surged a striking 56 percent. The decline comes as China's broader market rebounds, with investors questioning the high costs of development and intense price wars, a phenomenon dubbed "involution," which refers to overcapacity and deflation arising from disorderly competition.
The divergence highlights a critical challenge for investors in China's state-supported tech sector: even policy-backed champions like SMIC aren't immune to market pressures. The company's heavy spending on new fabrication plants (fabs) is weighing on margins and creating uncertainty about near-term returns, a risk that appears to be overriding optimism about the country's economic rebound.
The pressure on SMIC is a clear example of the "involution" that Beijing has sought to stamp out. This fierce internal competition, driven by soft domestic demand and overcapacity, creates a challenging environment for companies, even in high-priority sectors like semiconductors. While Beijing's push to upgrade its economy through investments in advanced technology has produced successes, it has also fueled a crowded and competitive landscape. For SMIC, this means pouring billions into capital expenditures to compete with global giants like TSMC and Samsung, as well as nimble domestic rivals like Huahong.
This dynamic of policy-driven investment creating both winners and losers is visible across China's market. In the electric vehicle sector, for instance, premium product lines and strong exports have buoyed larger players like BYD and Geely, which were up 2 percent and 19 percent respectively through mid-May. In contrast, smaller rivals XPeng and Xiaomi saw their shares fall more than 20 percent during the same period, weighed down by margin fears as a price war intensified.
For investors, SMIC's slide serves as a cautionary tale. The idea that "China is back" is a compelling narrative, supported by first-quarter GDP growth of 5.0% year-on-year. However, the recovery is uneven, and stock-picking remains a difficult task. The underperformance of policy-targeted sectors like technology services, which dropped 17 percent through mid-May, reflects deep-seated investor anxiety over high development costs and the long road to profitability for AI and chip companies.
The path forward for investors requires careful due diligence. As noted by Raychaudhuri, risks such as rising geopolitical tensions with the U.S. and the potential for disorderly competition to persist cannot be overlooked. While China's market presents durable, positive drivers, the volatility driven by policy and news has not disappeared. SMIC's performance demonstrates that even for a market leader in a critical industry, the path to sustained growth is fraught with challenges.
This article is for informational purposes only and does not constitute investment advice.
