China’s propping up the chips.

On Tuesday, an ETF that tracks an index of the biggest companies listed on Shanghai’s Science and Technology Innovation Board scored its largest single-session gain since October of 2024.

The advance, better than 11%, came a day on from an enormous inflow. Monday’s $2 billion influx nearly tripled the second-largest daily inflow looking back half a decade. The anomalous scale of the buying tipped the heavy hand of the state.

As the simple figure below shows, the product lost nearly 20% last week during a snowball-style rout in local tech stocks.

That was too much, too quick for authorities to countenance, particularly in the context of strategically important sectors. (Semis and other AI-adjacent names comprise a very large share of STAR 50 market cap, along with biotech.)

China’s caught up in the same semi rout and momentum unwind that hit the US, South Korea and Taiwan. Indeed, on most measures it’s worse in China.

The figure below, from SocGen’s Andrew Lapthorne, shows you the pain in momentum longs is considerably more acute for onshore Chinese equities than it is in other locales.

Lapthorne’s chart shows performance since June 25. The reversal in China over the past three weeks counts as an honest-to-goodness “quant quake.”

If you haven’t yet, you should read Monday’s admittedly tedious (as summer reading goes) piece on the momentum unwind. In that linked article, I quoted (who else?) Nomura’s Charlie McElligott, who said the magnitude of the “two-way velocity in crowded themes” had “both longs and shorts blowing through risk budgets” last week.

Bloomberg, paraphrasing a letter quant firm HanTak Investment Management sent to clients following a 16% one-week drawdown, explained the situation. “Factors that had previously offset one another — including momentum, liquidity and short-term reversal — moved lower at the same time, creating a rare headwind for quantitative strategies,” HanTak told investors. “Market volatility was also about 50% higher than last year, magnifying the impact on portfolios.”

The vaunted “National Team” (the consortium of state-sponsored entities which steps in to support Chinese stocks when the Party decides enough’s enough) was already active before Monday’s intervention in the tech ETF. Two state funds said Sunday they’d recently increased their holdings of local shares.

The CSI 300 (that’s the mainland benchmark) is coming off what might as well have been its worst week since 2021, while the CSI 1000 is just a bloodbath. As the figure above shows, the SMID pain is tied for the worst since the 2015/2016 collapse, when the National Team was first established.

The pain in small-caps wrong-footed a lot of local quants, including DeepSeek founder Liang Wenfeng, whose fund was apparently bludgeoned last week, along with most of its peers.

China’s determined to catch up in the AI race come hell or high US export restrictions, and that means maintaining favorable market conditions so startups like Moonshot can raise capital. An IPO for Kimi’s parent could come as early as this year. So, expect more state support.

In the meantime, the country’s notoriously melodramatic retail investor base is out of luck and feeling betrayed. As one early-thirtysomething who plowed around $150,000 into a quant fund just two weeks ago put it, in remarks to Bloomberg, “I bought it because I was told it could generate stable returns regardless of market direction.”

Bless their hearts. Charlie could’ve told them: “Running market-neutral with low nets should help you during a de-risking selloff, but during a violent momentum unwind, the reality is that ‘your gross is your net.'”