Commentary: Don’t Fear the Dip in Chinese Tech Stocks

Since the beginning of 2025, the Chinese mainland’s stock market has experienced a strong bull run fueled by a reversal in its technology narrative, which has driven up A-share prices. However, by September, the rapid upward momentum started to slow and market volatility increased, sparking concerns about a potential market pullback. Historically, bull markets are not continuous one-way gains – after rapid increases, it’s common for the market to undergo corrections of 10% or more. Such corrections often create optimal entry points for investors aiming to capitalize on future surges. [para. 1]

The earlier analysis (“What Causes a Bull Market? Can It Continue?”) explored the foundations of the current rally and projected its persistence. This article aims to dissect the causes of prior bull market pullbacks, examine their characteristics, and offer practical suggestions for investors facing such episodes. [para. 2]

A review of the past two decades reveals three distinct bull markets in A-shares: 2005–2007 (998 to 6124 points), 2014–2015 (2011 to 5178), and 2019–2021 (2441 to 3732). Across these periods, there have been 15 major pullbacks, defined as declines of 10% or more. The pullbacks were distributed as follows: eight in the 2005–2007 market, two in 2014–2015, and five from 2019–2021. [para. 3][para. 4]

Three main causes have triggered these declines. First, tightening at the micro-level—such as increased IPOs siphoning funds, higher stamp duties, or regulatory actions—was the most common, accounting for nine pullbacks. For instance, a regulatory crackdown on margin financing in January 2015 led to a 9.1% drop over a short period. [para. 5]

Second, macro-level liquidity tightening—stemming from central bank monetary policy shifts or external liquidity shocks—caused four major pullbacks. An example occurred in July 2006, when the central bank raised reserve requirements, leading to a 12.1% decline across several weeks. [para. 6]

Third, 'black swan' events like the COVID-19 outbreak or US-China trade tensions led to two major corrections. For example, the COVID-19 pandemic in January 2020 resulted in a 14.1% decline in the Shanghai Composite within three weeks. [para. 7]

These corrections have common features. First, the decline is usually rapid, averaging 12 trading days, with recovery to previous highs taking longer—an average of 26 trading days. [para. 8] The recovery speed varies by trigger: micro-liquidity pullbacks rebound fastest (18 days), macro-liquidity are slowest (43 days), and black swans are intermediate (26 days). [para. 9] Another characteristic is style and sector rotation, where high-flying sectors correct sharply and lagging ones often outperform during the pullback, as seen in the 2006 correction when leadership shifted from consumer staples to bank stocks. [para. 10][para. 11]

Despite these rotations, a single core investment theme tends to drive gains over the bull run. In 2005–2007, it was financials, real estate, and energy; in 2014–2015, “internet finance”; and in 2019–2021, “core assets” including premium consumer and new energy firms. Although sector leadership may rotate, the original theme often regains primacy. [para. 12][para. 13]

For investors, the recommended approach is to prioritize strategy rather than timing, waiting for corrections before increasing positions. Early entrants can use part of their gains as a buffer, while latecomers should keep positions light and look for deeper corrections to enter. Sector rotation is a common narrative, but investors are advised to maintain core exposure to the leading themes, such as “hard tech” (AI, innovative drugs), complemented by moderate allocation to other sectors like new energy and chemicals, which show signs of bottoming out and potential catalysts for recovery. [para. 14][para. 15][para. 16][para. 17][para. 18][para. 19]