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The AI Chip Boom Is Cracking Under China Competition and Circular Debt Fears
Market Rotation
By Rhea Lobo
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Semiconductors powered the biggest trade on Wall Street for the past 18 months. Now that trade is unwinding fast, and two threats are arriving at the same time.
The MSCI World Semiconductor index has fallen 16% this month, its worst stretch since 2022. The semiconductor rout went global. The Philadelphia Semiconductor Index dropped more than 25% from its June peak, while South Korea's chip-heavy Kospi tumbled nearly 11% in one session, triggering circuit breakers for the ninth time this year.
The first force is China. On Monday, shares of ChangXin Memory Technologies, known as CXMT, debuted in Shanghai and surged nearly 470% on their first day of trading.
CXMT makes DRAM chips, the memory components that power AI data centers and consumer devices. Its IPO raised fresh capital to expand production, which investors fear will flood the global market and drive down chip prices.
Separately, a report from The Information said three Chinese firms, including Semiconductor Manufacturing International Corp. and Hua Hong Semiconductor, had made significant advances in lithography machines. Lithography machines are the tools used to etch circuits onto silicon wafers.
ASML, a Dutch company, had been essentially the only supplier of advanced versions. If Chinese firms can produce their own, they can manufacture cutting-edge chips without relying on Western equipment or facing US export restrictions.
The second force is doubt about AI spending itself. Nvidia has reportedly entered roughly $750B in infrastructure deals, raising fears about what analysts are calling "circular" financing. That's when AI companies borrow heavily to fund each other's projects, creating an interconnected web of debt that amplifies losses if AI demand falls short of expectations.
OpenAI is reportedly nearing a deal to lease a $500B data center in Ohio, backed by $250B from Nvidia. The sheer scale of these commitments is what's rattling investors, not a single bad earnings print.
"Doubts over spending, returns and valuations are still deepening rather than fading."
Hebe Chen, Vantage Global Prime
The damage inside the sector isn't uniform. Samsung Electronics and SK Hynix each fell more than 13% in Seoul. Kioxia Holdings, Japan's flash memory maker, fell 18% in a single session and has lost roughly half its value in a month.
Micron Technology shed over $450B in market value from its June peak. Sandisk has been cut in half since late June.
Nvidia and Broadcom held up comparatively well. Nvidia briefly turned positive midday Tuesday, and Broadcom pared its loss to under 1%. That divergence matters. Memory chip makers are directly exposed to pricing pressure from Chinese competitors.
Nvidia and Broadcom sit higher in the AI stack, closer to software and custom silicon, which insulates them somewhat from commodity chip dynamics.
ASML dropped more than 10% across two sessions. Its entire investment case rests on being the sole supplier of the most advanced chipmaking tools. A Chinese workaround, even a partial one, erodes that moat directly.
What makes this selloff unusual is how contained it's been. The S&P 500 equal-weight index, which treats every stock equally regardless of size, rallied 1% to a record high on Tuesday.
Nearly three-quarters of S&P 500 stocks were higher in July, with the median stock up roughly 6%. Nine of eleven S&P 500 sectors were trading higher on the same day chip stocks were collapsing.
That split tells you this is still a sector story, not a macro one. The advance-decline line for the S&P 500 hit a record high Tuesday, meaning more stocks are rising than falling across the index as a whole. The moment that line breaks, it signals the chip rout is spreading into the rest of the market.
This week's earnings calendar will help clarify the picture. Meta, Microsoft, and SK Hynix report Wednesday. Amazon and Apple follow Thursday.
The big question is whether the hyperscalers, the cloud and tech giants spending most on AI infrastructure, will reaffirm or revise their capital expenditure plans. If they hold the line on spending, it stabilizes the demand side of the chip equation. If they pull back, the selloff has further to run.
