Explained: How China's breakthrough in memory chip and lithography shook global tech giants

AI-led rally in chip stocks seem to have hit a roadblock as shares of all major chip-making companies across the globe extended their fall on Wednesday. Chip-making companies in the US and the leaders of the AI rally, like NVIDIA, Micron, AMD, Qualcomm, Intel Corporation and Seagate, fell as much as 14% in the regular trading session on Tuesday.

Additionally, the carnage in chip stocks from Japan and Korea continued Wednesday morning as shares of SK Hynix and Samsung Electronics, the leaders in memory chip makers, fell as much as 9% on Wednesday. The correction in chip stocks and the broader AI theme has spooked global investors as they assess the elevated risks after an exuberant rally.

Here are key factors that led to a sharp fall in chip stocks across the globe

Resurgence of China in AI

China has been making headlines in the AI space with the launch of new AI models, challenging the dominance of US-based AI companies like Google, OpenAI and Anthropic. However, Chinese AI models like DeepSeek, Kimi K3 and Alibaba’s Qwen 3.8 have consistently given tough competition to the West-based AI models. Despite this, the US, Korea, and Japan have maintained dominant positions in the AI hardware segment and enjoyed the fruits of exuberant demand.

However, China is now ready to challenge this space as well with its launch of semiconductor chips. ChangXin Technology Group Co. is China’s leading semiconductor chip manufacturer and surged over 500% on its debut in Chinese markets is now buzzing as a new entrant in the AI space. The company also became the most valuable Chinese company listed in China soon after its debut. Media reports claimed that Apple is in talks to partner with ChangXin to develop and manufacture memory chips. As primary DRAM chip makers like SK Hynix and Samsung Electronics shifted their assemblies and capacities to manufacture HBM chips, the prices of memory chips soared through the roof, increasing the cost for cell phone makers.

ChangXin Technology holds 8% market share, only behind Samsung and SK Hynix in the DRAM chip market, highlighting its strong positioning in the industry. The resurgence of Chinese makers in the memory chip market spooked the global investors who rode the rally in SK Hynix, Samsung, Micron, SanDisk and others.

The Chinese resurgence is not just limited to chip making, as a state-backed lithography machine maker has started manufacturing deep ultraviolet lithography machines, challenging the fort long held by Dutch lithographic maker ASML. According to a report by The Information, the state-backed company would manufacture up to 20 machines by 2027 and currently remains at the prototype stage. Soon after the report was out, shares of ASML plunged over 8% on Tuesday, plunging more than 20% in July.

Overheated valuations

Chipmakers across the US, South Korea and Japan witnessed an exuberant rally in their share prices starting in H22025. Shares of SanDisk surged more than 850% in 2026 at its peak performance, SK Hynix surged 357%, Samsung Electronics soared 250%, and Micron surged 350% at its peak. The share price performance was also led by strong fundamental performance. Samsung Electronics’ entire year’s profit for 2026 is expected to surpass the semiconductor business’s cumulative profit in 40 years. SK Hynix posted record-quarterly profits in Q2 2026, surging 550% to KRW 93.9 trillion.

However, at this pace, investor expectations often race ahead of the fundamental reality and lead to disappointments. Despite a 550% surge in net profit, SK Hynix's profitability numbers missed the analyst estimates, which triggered a massive selloff in the share price.

The selloff also sent shockwaves to the US as shares of SanDisk plunged over 14% on Tuesday, down more than 55% from its record-high levels. Alongside this, shares of Micron, AMD, and Intel Corporation also plunged as much as 9%.

Changing macro dynamics

The macroeconomic environment is fast changing with reignited fears of sticky inflation. Higher-for-longer inflation numbers would invite higher-for-longer interest rates in developed economies like the US, which would impact the sentiment for mega hyperscalers of AI like Google, Amazon, Meta, and Microsoft. The majority of the demand for these high-end high-bandwidth memory chips is dependent upon the infrastructure investments made by the above-mentioned hyperscalers. Moreover, investors of the mega-cap hyperscalers are also worried about the tangible ROI on these investments, creating a loop of worry.

In summary

In simple words, China is creating its own stack for AI infrastructure right from critical minerals, lithography machines, to chips that power its own AI models. The resurgence of China in the AI ecosystem comes at a time when global investors worry about tangible ROI from the massive investments, elevated geopolitical tensions and exuberant valuations. Will the resurgence also translate into a stock price rally? This needs to be monitored, as Chinese and Hong Kong markets trade with deep discounts to their peers and have underperformed in the global AI rally.