Why Did China A-Shares Plunge at the End of 2025? Can a Turning Point Emerge After Risk Release?

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A-shares have recently fallen, and this adjustment is the result of multiple factors resonating together. It stems from concerns over the bubble in the overseas artificial intelligence sector, as well as crowded trading in high-level sectors and fluctuations in some economic data.

This is not the beginning of a unilateral bear market but a rapid concentrated release of risks. Investors should view market fluctuations rationally and pay attention to potential structural opportunities that may emerge after risks are cleared.

Key Takeaways

• The decline in A-shares is caused by multiple factors, including concerns over the overseas AI bubble, fluctuations in China’s economic data, and profit-taking in high-level sectors.
• This decline is not the start of a bear market but a concentrated release of risks, with the market in the process of bottoming.
• The market has potential for a turning point in the future, with policy support, easing external environment, and improvement in corporate earnings as the main catalysts.
• Investors should adopt a “defense plus offense” strategy, focusing on high-dividend assets and companies with performance growth.
• Maintain patience and seize structural investment opportunities brought by market adjustments.

Reviewing the Plunge: How Internal and External Risks Resonated

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This adjustment was not caused by a single factor but by the superposition of multiple pressures from home and abroad, jointly acting on the market’s vulnerable links. We can clearly review the transmission path of this decline from three dimensions: overseas, domestic, and market structure.

Overseas Disturbances: Global Risk Appetite Declining

The storm started overseas. In the second half of 2025, global market enthusiasm for the artificial intelligence sector began to cool, with bubble concerns significantly intensifying. This concern is not groundless, mainly stemming from several core issues:

• Highly Concentrated Risks: The vast majority of AI investments and key trades are concentrated in a few giant companies. This interdependent structure, if AI technology development or commercialization falls short of expectations, could easily trigger a chain reaction similar to the 2008 financial crisis.
• Disconnect Between Valuation and Reality: Venture capitalists have generally expressed concerns about the rapid growth valuations of AI startups. Although AI is revolutionary technology, there is a huge gap between the commercial value it can achieve in the short term and the sky-high valuations of some companies.
• Doubts About Circular Trading: The market has circulated news of a deal worth up to 100 billion dollars between NVIDIA (Nvidia) and OpenAI, with its structure interpreted by some as potentially artificially inflating the real market demand for AI chips.

This concern over the overseas AI sector was rapidly transmitted through sentiment and capital channels. As global investors’ risk appetite declined, they first sold the highest-valued and largest-gaining tech stocks. This risk-aversion sentiment spread to the A-share market, causing AI-related tech sectors to bear the brunt and face enormous pressure.

Domestic Pressure: Economic Data Fluctuations Caused A-Shares to Fall

If overseas disturbances were the trigger, then short-term fluctuations in some domestic economic data in mainland China amplified the market’s pessimistic sentiment.

According to official data, China’s Manufacturing Purchasing Managers’ Index (PMI) for October 2025 recorded 49.0, not only below the 50 boom-bust line but also failing to meet the market’s general expectation of 49.6. This data indicates a more pronounced slowdown in manufacturing activity than expected.

Although a single month’s data does not fully represent the long-term economic trend, in the market environment at the time, it directly undermined investors’ confidence in the resilience of economic recovery. The market’s reaction was very direct: trading volume in the two cities shrank abruptly, showing funds’ wait-and-see and retreat; over 3,800 stocks weakened on the market, clearly reflecting a lack of confidence in the broad decline pattern. It can be said that it was this below-expectation PMI data that caused the already pressured A-shares to fall.

Structural Imbalance: Profit-Taking in High-Level Sectors

The market’s own structural issues are the key internal cause for this adjustment being both fast and deep. Before the decline occurred, the market had obvious “structural imbalances”—funds were overly concentrated in a few hot tracks.

Taking U.S. stocks as an example, market concentration reached unprecedented levels. By the end of 2025, the market cap proportion of the best-performing few stocks reached 38%, more than double the 17% from ten years ago, with NVIDIA alone accounting for about 8% of the S&P 500’s market cap. A survey by Bank of America showed that as many as 54% of institutional investors believe AI stocks have a bubble.

The A-share market had similar situations. Sectors like AI and new energy, which had huge gains earlier, attracted massive capital inflows, forming a “crowded trading” situation.

When negative catalysts such as overseas risk transmission and domestic data disappointments appeared, these crowded high-level sectors became the “hardest-hit areas” for profit-taking funds. Institutional investors’ concentrated selling triggered a stampede effect, leading to rapid share price declines. Therefore, this time A-shares fell largely as a concentrated risk release targeting previously over-traded sectors.

Outlook for the Future: Is a Spring Rally Anticipated?

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After experiencing rapid risk release, the market’s panic sentiment has been significantly alleviated. Investors are generally concerned about where the bottom is and when the turning point will arrive. Looking ahead, although short-term fluctuations are unavoidable, positive factors are gradually accumulating, laying the foundation for a potential “spring rally” or “year-end offensive.”

Short-Term Judgment: Market Entering Oscillation and Bottom-Building Phase

After a rapid decline, the market usually does not immediately turn into a unilateral rise but enters a phase of repeated oscillations and building a bottom. The current market is in this period. A-shares recently fell, releasing a large amount of risk from high-level sectors, but restoring investor confidence takes time.

During the bottom-building period, the market exhibits the following characteristics:

• Trading Volume Shrinks Then Gradually Warms Up: After panic selling clears out, market trading becomes light. As some funds attempt to bottom-fish, volume mildly expands.
• Faster Hotspot Rotation: Lacking a clear main line, funds quickly switch between different sectors, seeking opportunities.
• Indices Rise and Fall Alternately: Indices repeatedly tug within a certain range, with long and short forces reaching temporary balance.

This phase tests investors’ patience. The oscillation and bottom-building process is also when high-quality assets are wrongly killed, gradually revealing value again, providing a window for subsequent positioning.

Medium-Term Outlook: Three Catalysts for Year-End Offensive

From a medium-term perspective, catalysts supporting the market to emerge from the bottom and start a new round of upward momentum are forming. There are mainly three positive signals worth focusing on.

1. Confirmation and Intensification of Policy Bottom Macro policies are key variables affecting market direction. As economic data shows short-term pressure, market expectations for more growth-stabilizing policies from mainland China have significantly warmed. These potential policy toolboxes cover multiple areas, aimed at boosting domestic demand and market confidence.

• Real Estate Market Support: May include subsidies for new homebuyers, reducing transaction costs, or even increasing government purchases of unsold homes to stabilize expectations.
• Consumption Stimulation: Expected to expand “trade-in” policies to more categories and possibly launch new consumption support measures, such as expanding the scope of service consumption vouchers.
• Industrial Upgrade and Innovation: China will continue to focus on industrial modernization and technological development, promoting industries to climb upstream in the value chain, bringing long-term growth momentum to related fields.

2. Stage Easing of External Environment Geopolitical disturbances are an important factor affecting global markets in 2025. Currently, U.S.-China relations have entered a complex phase of competition and dialogue coexisting. Although fundamental issues remain, high-level interactions have brought valuable “predictability” to the market. For example, planned U.S.-China high-level meetings in April and December 2026 will help set guardrails for bilateral relations and avoid escalation of conflicts. The stage stability of the external environment creates favorable conditions for repairing global investors’ risk appetite.

3. Gradual Confirmation of Corporate Earnings Bottom Long-term support for stock prices ultimately comes from corporate earnings. With the gradual implementation of growth-stabilizing policies and recovery of economic activities, corporate earnings are expected to bottom out and rebound in the first half of 2026. When the market sees clear signals of improving earnings expectations, a valuation repair rally will unfold. Especially industry leaders showing strong resilience in the economic cycle will first attract capital favor.

Market Sentiment: Risk Appetite Is Rising

Market sentiment is a “barometer” for observing turning points. After concentrated selling, the most panicked moment has passed, and investors’ risk appetite is slowly rising from the freezing point. An obvious sign is that the market’s reaction to negative news is dulling, while it is more sensitive to positive news. Funds’ behavior patterns have shifted from previous “selling at any cost” to “seeking high-quality chips on dips.”

Confidence is more important than gold. When market participants shift from general pessimism to cautious optimism, capital inflows will provide the most direct driving force for the market to rise. The rise in risk appetite is an important prerequisite for the rally to start and continue.

Positioning Now: How to Seize Structural Opportunities

After market risk release, investors’ focus shifts from avoiding risks to seeking opportunities. In the current oscillation and bottom-building phase, a clear positioning approach is crucial. Investors can revolve around “defense” and “offense” two main lines, adopting a balanced allocation strategy to seize structural opportunities brought by market adjustments.

Defense Main Line: Hold Firm to High-Dividend Assets

In a market environment with high uncertainty, high-dividend assets are the “ballast stone” of investment portfolios. The core advantage of such assets is providing stable and predictable cash flow returns. No matter how stock prices fluctuate, continuous dividends can provide investors with a safety cushion.

For example, some high-quality dividend index components have stable dividend yields. Taking a certain index as an example, its recent data shows:

During the market confidence repair period, such assets with high safety margins and stable returns often attract risk-averse funds, exhibiting strong resistance to declines.

Offense Main Line: Focus on Directions with Pre-Increased Annual Report Performance

The long-term driving force of the market ultimately comes from corporate earnings. As the market enters the stage of trading 2025 annual report performance, seeking directions with high performance certainty and clear growth prospects is key to offensive positioning.

According to earnings forecasts for some markets, information technology, industrials, and materials sectors are expected to achieve leading year-over-year growth.

In addition, the recently volatile major financial sector is also worth attention. Although valuations in some financial sub-sectors are not low, certain areas that have undergone sufficient adjustments and are highly correlated with economic recovery, such as some banks holding licenses in Hong Kong, may have repair potential due to their stable operations and lower valuations. Investors should focus on companies where performance can truly be realized and valuations are reasonable.

Strategy Core: Balanced Allocation and High-Low Switching

The key to successful investment strategy is balancing offense and defense. At the current juncture, balanced allocation and high-low switching are the core of the strategy.

• Balanced Allocation: Means holding both defensive high-dividend assets and offensive growth stocks simultaneously. The defensive part aims to protect the portfolio during market declines, while the offensive part captures opportunities during market rises.
• High-Low Switching: Refers to strategically shifting funds from sectors with excessive previous gains and crowded trading to low-level sectors with solid fundamentals but fully adjusted stock prices.

The key to long-term investment success lies in combining defense and offense methods. This balanced strategy provides resilience during market downturns and seizes growth opportunities when the market warms, achieving smoother long-term returns.

A-shares recently fell, but this is more a concentrated risk release under the superposition of multiple factors, clearing obstacles for the market’s subsequent healthy operation. Historical data shows the possibility of a “spring rally”, but investors also need to be wary of potential risks such as market rises driven only by a few stocks. Looking ahead, positive factors are accumulating.

It is recommended that investors maintain patience, adopt a “defense + offense” balanced allocation strategy, and actively seize structural positioning opportunities brought by market adjustments.

FAQ

What is the core reason for this major A-share plunge?

This adjustment is the result of multiple factors resonating. It stems from concerns over the overseas AI sector bubble, as well as fluctuations in some domestic economic data in mainland China and profit-taking in high-level sectors. This is a concentrated risk release.

Is this round of decline the beginning of a long-term bear market?

Market analysis generally believes that this is not the start of a unilateral bear market. It is more like a rapid risk clearance, clearing obstacles for the market’s subsequent healthy operation, and investors should view short-term fluctuations rationally.

What specific strategy does “high-low switching” mentioned in the article refer to?

“High-low switching” is an investment positioning approach. It suggests investors gradually shift funds from sectors with excessive previous gains and crowded trading to low-level sectors that have undergone sufficient price adjustments with solid fundamentals.

What are the positive catalysts in the market outlook?

Positive factors are accumulating. They mainly include three aspects: expectations for intensified growth-stabilizing policies, stage easing of the external geopolitical environment, and corporate earnings expected to bottom out and rebound in 2026.