State-backed funds made a high-profile intervention in the market, with a massive 55.1 billion yuan flowing into broad-based ETFs over the past week. Fund managers, including Jin Zicai, increased their positions in AI supply-constrained sectors, while Xie Zhiyu issued a stark warning, calling the current environment "dangerous."

The week from July 20 to 24 was marked by volatile trading and a flurry of key signals. The Shanghai Composite Index briefly fell below the 3,800-point mark. In response, state-owned entities like China Chengtong and China Reform Holdings stepped in, private equity funds launched a wave of self-buying, and major institutional investors, including insurance funds, signalled plans to increase their equity allocation.

This concerted effort to stabilise the market funnelled significant capital into broad-based ETFs, which emerged as the primary beneficiary of the new inflows. The pace of capital absorption by these ETFs quickly reached an extreme high for the year.

On July 17 and 20, broad-based ETFs across the market saw net inflows of 64.692 billion yuan and 59.06 billion yuan, respectively, setting a new annual high and the second-highest level.

On July 20, the Huatai-PineBridge CSI 300 ETF recorded a single-day net inflow of over 14.071 billion yuan, its largest since the tariff trade friction in April 2025, pushing its total assets back above the 100 billion yuan mark for the first time in 15 trading days.

Popular broad-based ETFs, including the ChinaAMC STAR 50 ETF, the E Fund ChiNext ETF, and the Huatai-PineBridge CSI 300 ETF, saw daily trading volumes exceed 10 billion yuan for three consecutive days. The trading volumes for the ChinaAMC STAR 50 ETF and the E Fund ChiNext ETF on July 20 reached their highest levels since November 2024.

For the week overall, market volatility remained high. Among core indices, large-cap blue chips led the gains, creating a sharp divergence in style, while small-cap and micro-cap stocks suffered steep declines. The performance gap between the CSI 300 Index and the micro-cap index was over 8 percentage points for the week, clearly indicating a capital shift towards large-cap, high-liquidity stocks, while small-cap stocks experienced a liquidity squeeze. The Beijing Stock Exchange 50 Index, the weakest performer this year with a 28.37% decline, continued to face pressure.

The concentration of capital flowing into large-cap blue chips via ETFs was evident. Equity ETFs saw a net inflow of 55.1 billion yuan, with broad-based ETFs alone accounting for 53.35 billion yuan. This inflow propelled the CSI 300 Index up by 2.65% and strengthened the Shanghai 50 and other large-cap weighted indices. Inflows into sector and theme ETFs were minimal, suggesting the week's rally was driven by a systemic re-rating of large-cap stocks rather than a specific industry theme. Concurrently, bond ETFs saw net inflows of 5.87 billion yuan, and commodity ETFs saw 4.646 billion yuan, as investors balanced their pursuit of large caps with allocations to defensive assets to hedge against small-cap risks.

From the perspective of fund managers, the landscape of leading ETF providers remained largely stable for the week.

The three major players—China Asset Management, E Fund Management, and Huatai-PineBridge Fund Management—formed a clear "top-tier capital absorption group." Their ETF sizes grew by 26.795 billion yuan, 24.246 billion yuan, and 22.819 billion yuan, respectively, over the week. Net subscription inflows were also high, reaching 16.7 billion yuan, 14.9 billion yuan, and 16.8 billion yuan, respectively. This demonstrates a high concentration of capital in the broad-based ETF products offered by these three leading institutions.

Huaan Fund, with a weekly size increase of 7.851 billion yuan, moved up one spot to 11th place, displacing Haitong Fund. In contrast, Harvest Fund saw its size shrink by 17.3 billion yuan over the past month, making it the only major institution to experience a significant monthly decline.

Looking at the underlying benchmark indices, the net subscription inflows for the week were highly concentrated yet broad in coverage.

The first tier consisted of broad-based indices. ETFs tracking the CSI 300 Index led with a weekly net subscription inflow of 19.916 billion yuan, closely followed by the STAR 50 Index with 19.16 billion yuan. Together, these two contributed nearly 40 billion yuan of the new capital. The CSI A500 Index also saw inflows of 9.546 billion yuan, establishing these three broad-based indices as the primary capital magnets.

The second tier was growth-oriented. The ChiNext Index saw net subscription inflows of 6.574 billion yuan, while the STAR ChiNext 50 Index and the ChiNext 50 Index attracted 1.948 billion yuan and 1.765 billion yuan, respectively. This shows that alongside the embrace of large caps, capital also maintained an interest in high-quality growth tracks.

The third tier comprised structural themes. The STAR Semiconductor Materials & Equipment Index saw net subscription inflows of 6.287 billion yuan for the week. This contrasted with the broader semiconductor materials and equipment sector, which experienced net outflows of 1.242 billion yuan. This suggests that capital made a fine-grained selection within the semiconductor sector, favouring sub-sectors with stronger science and technology innovation attributes. Additionally, the SGE Gold 9999 product saw net inflows of 4.281 billion yuan, clearly reflecting a commodity-based risk-aversion logic.

Examining the list of individual ETFs with the largest net capital inflows, 16 of the top 20 were equity ETFs. These were concentrated in two main areas: large-cap broad-based ETFs and tech-heavy STAR Market ETFs, presenting a clear structure that balances both offensive and defensive positioning. Indices like the STAR 50 and ChiNext led the way, while broad-based ETFs like the CSI 300 and A500 attracted significant capital across the board.

The ChinaAMC SSE STAR 50 ETF topped the list with a net inflow of 14.567 billion yuan, also recording a weekly gain of 4.32%. The Huatai-PineBridge CSI 300 ETF saw a net inflow of 12.307 billion yuan, with a gain of 2.44%. The E Fund ChiNext ETF attracted a net inflow of 5.839 billion yuan. These three popular broad-based ETFs collectively drew in over 32 billion yuan, highlighting the intense concentration of capital in these benchmark products.

Three STAR Market semiconductor materials and equipment theme ETFs from China Asset Management, Huatai-PineBridge, and Penghua Fund had a combined net inflow of approximately 6.4 billion yuan, placing them among the top for net inflows. Defensive asset classes like gold, bonds, and money market funds also showed clear net capital inflows.

On the list of ETFs with the largest net capital outflows for the week, the direction of capital withdrawal was very clear. Communication equipment, the CSI 1000 Index, and semiconductor chips were the three main areas of exit.

The Guotai CSI All Share Communication Equipment ETF saw the largest net outflow at 5.583 billion yuan. The ChinaAMC CSI 5G Communication Theme ETF experienced a net outflow of 1.348 billion yuan, making the communication sector the most concentrated area of capital withdrawal. This follows recent discussions about the high concentration of public fund holdings in the electronics and communication sectors, suggesting profit-taking after the recent rally. Notably, three ETFs tracking the CSI 1000 Index had combined outflows of nearly 7.8 billion yuan, and the ChinaAMC SSE 50 ETF saw a net outflow of 2.4 billion yuan, indicating caution in both small-cap and dividend-yielding sectors.

Looking at the top 20 ETFs by weekly gain, while most were equity ETFs, their performance was heavily influenced by underlying commodity prices. Gold-related equity ETFs dominated the top of the charts, oil and gas ETFs followed with broad gains, and the Soybean Meal ETF also ranked highly. The surge in gold and oil was more a result of sentiment transmission from externally priced assets rather than active buying from within the A-share market. The overall attitude of capital towards commodity ETFs appeared to be "selling into the rally."

Six gold-related equity ETFs occupied the top six spots on the gainers' list, all with gains exceeding 9.7%. However, aside from the Yong Ying ETF, which had a net inflow of 1.337 billion yuan, the other five all experienced net outflows.

On the list of the top 20 ETFs by weekly decline, the market's sell-off was highly focused. Robotics, animation and gaming, the CSI 2000 Index, and the STAR Market Growth Index were the four main areas of decline. The vast majority of ETFs on this list fell by more than 6%, reflecting a broad-based downturn. Despite the losses, some products like the robotics industry ETFs from Penghua Fund, Invesco Great Wall Fund, and E Fund, as well as the Guotai Animation & Gaming ETF, actually saw counter-trend net inflows, demonstrating that some investors were buying into the weakness.

The second-quarter fund reports were fully released this week, revealing key insights from several fund managers.

Jin Zicai, Deputy General Manager and Equity Investment Director at Caitong Fund, managed several funds that capitalised on the technology sector's rally in Q2. He believes that as the economy transitions from old to new growth drivers, the current market trend is deeply resonating with the AI industry trend. The expansion of valuations for tech growth stocks, alternating with fundamental validation, has become the core logic driving the A-share structural market in the first half of the year.

Regarding the market, Jin Zicai noted that an increasing number of links in the AI supply chain are becoming tight. He previously observed tightness in areas like EML and DSP chips for optical chips, fiberglass cloth, and HVLP4 copper foil. However, to adapt to new supply chain dynamics, he maintains allocations to other AI-demand-driven tight areas. He is concentrating his limited portfolio positions into industries experiencing supply bottlenecks, including passive components like MLCCs and various upstream materials for PCBs.

Xie Zhiyu, a renowned fund manager from China Merchants Bank's asset management arm, was blunt in his Q2 report, stating that the extreme divergence seen in the second quarter is unsustainable. Looking ahead to Q3, he expects the market will rebalance. He highly recognises and is optimistic about the AI industry's development trend, viewing the dynamic adjustments to investment pace by overseas giants as normal business decisions. This does not, in his view, mean the AI trend has peaked or that overseas capital expenditure growth will halt abruptly. However, he warned that the market's enthusiastic pursuit of the AI inflation chain in Q2, particularly assigning high long-term price expectations and valuations to current tight sectors, is "very dangerous." He cited the previous new energy expansion cycle as a reference, where the turning point for stock prices often precedes the turning point in fundamental prices.

Chen Jinwei, Deputy Director of the Equity Investment Department II at Penghua Fund, argued that trying to explain the Q2 market from a fundamental perspective was largely meaningless. He observed that it wasn't that other industries lacked fundamental issues; rather, any sector not related to AI hardware suffered similar declines. He attributed this to two factors: a pure stock market game caused by a lack of new capital inflow (unlike the leveraged funds of 2015 or the mutual fund inflows of 2021), and the increasing share of trading volume from quantitative funds and ETFs, most of which are not pricing assets themselves. This, combined with subjective fund managers being forced to adjust positions due to liability-side pressures, created the dynamic.

Despite the market's punishment, Chen Jinwei noted the necessity of moving forward. He remains optimistic about sectors representing domestic demand, such as consumer staples, healthcare, and some midstream industries.

Ren Jie, a fund manager at Yong Ying Fund known for technology investing, mentioned "defence" twice in his Q2 report. Citing increased market volatility this year, he stated that his fund has proactively increased defensive arrangements. In terms of stock selection, he is favouring companies closer to downstream customers, those with continuously rising market share, and those with relatively reasonable price expectations, aiming to smooth portfolio volatility.

Ren Jie stated, "At this point, we remain firmly optimistic about the long-term growth value of the AI industry. However, we also aim to ensure a better holding experience for most investors through more balanced and defensive portfolio management, seeking a better balance between the industry's long-term trend and the stable operation of net asset value."

Yao Wenqiang, the manager of the highly-watched Ping An Technology Select Fund, pointed out that the global tech sector and A-share AI hardware sector experienced a rapid correction from late June to early July, significantly increasing divergence in industry investment views. He attributed the adjustment to a confluence of three factors: trading structure, macro interest rates, and industry events. He judged this correction to be a rebalancing of valuations and concentrated positions at the trading level, a temporary pullback driven by short-term events and sentiment resonance. He believes the medium-to-long-term core logic of AI commercialisation and expanding computing power demand remains intact, making this pullback a quality window for deploying AI core assets.