Funds that had bet on South Korea's AI narrative for half a year may now be executing a large-scale retreat.

On July 9th, the Korea Composite Stock Price Index (Kospi) plunged 5.4% in a single day, marking a cumulative decline of approximately 20% from the record high set last month and officially entering a technical bear market. This turn of events is particularly dramatic. Earlier this year, the Kospi was among the world's best-performing major equity indices, boasting a year-to-date gain as high as 116%. That gain has now receded to about 72%.

Amid the South Korean market's sharp decline, Goldman Sachs' thematic research team released a report, advising clients to shift their exposure from Korean AI trades to the "China AI value chain." Yesterday, capital accelerated its exit from South Korean chip stocks, flowing into Hong Kong's tech sector, with the Hang Seng China Enterprises Index surging as much as 4.5% intraday and Alibaba's Hong Kong shares jumping over 13%.

South Korea's Market: From Top Performer to Bear Market

The Kospi index fell 5.4% on Wednesday. Leading the decline were the very stocks that had previously driven the index's surge – SK Hynix Inc dropped 5.7%, and Samsung Electronics Co Ltd fell 6.3%.

Ironically, Samsung just this week reported quarterly profits that soared 19-fold year-over-year, yet its stock price still tumbled. This indicates that market concerns are no longer focused on current profitability but on the future: can the AI capital expenditure boom be sustained?

Fidelity International portfolio manager Ian Samson directly addressed the core issue: "A lot of the volatility comes from uncertainty around the fundamentals. We are indeed seeing that AI-driven semiconductor demand is real and huge – but it's being supported by about $1 trillion in capital expenditure controlled by just a handful of large tech companies." Once this spending slows, the downside risk will materialize rapidly.

Another structural risk for the South Korean market involves leverage. According to Bloomberg, a significant number of retail investors are heavily exposed to chip stocks through leveraged ETFs, which can amplify declines when market sentiment reverses. Foreign investors have also been persistent sellers – global funds have offloaded over $100 billion worth of South Korean local equities year-to-date.

Additionally, media reports suggest the rise of domestic Chinese chipmakers. There have also been reports that Apple is lobbying the U.S. government for permission to purchase memory chips from ChangXin Memory Technologies (CXMT).

Where is the Capital Flowing?

The capital flows speak for themselves.

The Hang Seng China Enterprises Index surged 4.5% on Wednesday, marking its largest single-day gain since February 2025. Alibaba's Hong Kong shares soared over 13%, while Tencent rose more than 4%. So far this month, the Hang Seng series of indices are the best-performing benchmarks in Asia, while the Kospi is the worst.

Reed Capital CEO Gerald Gan stated, "The performance divergence between China and the rest of the world is particularly stark, creating an attractive value opportunity for Chinese equities. The major Chinese tech companies are exactly the targets where we are accumulating positions."

He also noted that the AI-driven rallies in South Korea and Taiwan "may be showing signs of fatigue," and investor awareness of portfolio concentration risk is increasing, making rebalancing at this juncture "reasonable."

Goldman Sachs Weighs In: Recommends the "China AI Value Chain"

This capital rotation has now received Goldman Sachs' endorsement.

The bank's research team recently published a report titled directly: "Trade Idea: Long China AI Value Chain." Report author, analyst Louis Miller, wrote, "China AI has officially come onto our radar."

Goldman Sachs recommends clients buy into its proprietary "GS China AI Value Chain" basket product, which covers the entire industrial chain from power and semiconductors to AI infrastructure, AI models, and AI applications.

The analysts present three core rationales:

First, Chinese AI valuations are severely depressed.

Since the end of 2022, global AI-related stocks have collectively created $34 trillion in market value, with China's share being minimal. The current market value of Chinese AI-related stocks is approximately $4 trillion – a figure analysts believe is "significantly low" relative to China's actual position in the global AI industry.

Supporting data: China accounts for 10% of global AI-related market cap and 16% of AI-related revenue, yet global mutual fund managers' allocation to Chinese technology stood at just 1.2% as of January 2026.

The bank's research also estimates that the potential economic benefits from AI, through efficiency gains and new profit creation, could be 50% to 100% higher than the expectations currently implied by AI stock prices.

Second, China's structural advantages are undervalued by the market.

Analysts believe China possesses competitive advantages in infrastructure, power, and the semiconductor segment of the AI supply chain, which are not yet fully priced in.

Third, Chinese AI stocks are already outperforming other Chinese assets but still lag significantly behind U.S. AI peers. This implies room for catch-up remains.

Supporting Rationale: Multiple Catalysts in Play

The bank argues this round of Chinese AI performance is structural, not a fleeting rebound, and lists several concrete supports:

Surge in Chip Exports: China's chip sales in May surged 111% year-over-year, with overall exports up 19.4% – the strongest in three months – primarily driven by demand for AI hardware.

Index Reconstitution: Major Chinese exchanges are adjusting benchmark indices to include more domestic AI and semiconductor companies, which will channel passive funds into strategic technology sectors.

IPO Acceleration: ChangXin Memory Technologies (CXMT) has received formal approval to list on Shanghai's STAR Market, marking one of the largest A-share IPOs this year.

The bank specifically emphasizes that this is not a KWEB (China Internet ETF) trade, but a structural opportunity covering the entire AI industrial chain.