Semiconductor Industry: A New Cycle Driven by Breakthroughs and Capital Resonance
Keywords: semiconductors, domestic substitution, capital flows, technological iteration, industry cycle
Introduction
Semiconductors, the "lifeblood" of modern electronics, are the physical foundation of the digital economy. From smartphones to AI servers, from 5G communications to new energy vehicles, every wave of technological progress depends on higher semiconductor performance and ample capacity. In 2025, amid intensifying geopolitical competition, surging AI computing demand, and China's accelerating domestic substitution, the semiconductor industry is at a critical turning point. At the same time, Southbound Stock Connect funds continue to flow into Hong Kong's technology sector, signaling strong international confidence in China's semiconductor and broader tech recovery. This capital trend is not only a barometer of market sentiment, but also reflects profound shifts in industry fundamentals and long-term logic. This article examines the industry's new-cycle characteristics and investment opportunities from three angles: technological evolution, supply-chain restructuring, and capital resonance.
1. Technological Iteration: From Leading-Edge Processes to Heterogeneous Integration
The core driver of semiconductor technology has always been Moore's Law. Although the physical limits of transistor scaling are increasingly being approached after 7nm, 5nm, and even 3nm nodes, the industry has not stopped innovating. TSMC, Samsung, Intel, and other giants are extending the performance curve through advanced packaging, Chiplet technology, and new materials such as germanium-silicon and 2D materials. Take Chiplet as an example: by packaging chip modules with different processes and functions together through high-speed interconnects, it reduces the difficulty of manufacturing a single die while enabling flexible scaling of system performance. This "heterogeneous integration" concept is reshaping chip-design paradigms from high-performance computing to edge AI.
In China, although top-end equipment such as extreme ultraviolet lithography remains constrained by external restrictions, domestic semiconductor companies have made significant progress in specialty processes for mature nodes, analog chips, power semiconductors, and the RISC-V architecture. For example, domestically produced IGBTs and SiC devices have entered the new energy vehicle supply chain, and local EDA tools are beginning to serve small and midsize design firms. More importantly, the entire industry is shifting from a rough "buy equipment, build lines" model to a more refined path centered on R&D and ecosystem strength.
2. Supply-Chain Restructuring: Building Resilience Amid Geopolitical Rivalry
Semiconductors are one of the most finely divided industries in global specialization, but recent supply-chain security concerns are rewriting the traditional globalization narrative. The United States, Japan, and Europe have all introduced subsidy laws for domestic chip manufacturing, while China is accelerating core technology breakthroughs through a new national effort system. This regionalized, multipolar layout may raise costs in the short term, but in the long run it is fostering more diversified supply-chain resilience.
It is worth noting that China's semiconductor industry has not fallen into an insular, go-it-alone dead end. On one hand, domestic wafer-fab capacity continues to expand, with new lines at SMIC, Hua Hong Semiconductor, and others ramping up steadily, and utilization rates for mature-node capacity remaining at relatively high levels. On the other hand, China is still the world's largest semiconductor consumption market, accounting for more than one-third of global demand. This demand-pull effect makes any attempt at "decoupling" face enormous resistance. In fact, many international semiconductor giants still view China as a key engine for revenue growth and are actively seeking cooperation within compliance boundaries.
In addition, long-tail applications such as automotive electronics, industrial control, and the Internet of Things place relatively forgiving requirements on chip manufacturing processes, providing abundant use cases for validating domestic equipment and materials. Once any link achieves a breakthrough from "usable" to "easy to use," the flywheel effect across the ecosystem will accelerate.
3. Capital Resonance: Industrial Confidence Behind Southbound Inflows
The chart shows the trend of continued net inflows via Southbound Stock Connect into Hong Kong's technology sector since 2025. This capital movement is not an isolated event, but a concentrated reflection of global investors' expectations for a new semiconductor and technology cycle. In early 2025, as AI large models moved into edge inference, intelligent connected vehicles, and industrial automation, the semiconductor demand mix changed significantly: memory chip prices rebounded from the bottom, analog chip inventory destocking was nearing completion, and power semiconductors benefited from new energy infrastructure with full order books.
As a bridgehead for international capital allocating into Chinese assets, Hong Kong's technology sector includes many leading companies in semiconductor design, manufacturing, and equipment/materials. When Southbound Stock Connect funds accelerate in, it often means overseas capital is also participating indirectly through the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect channels. This not only improves liquidity for the related companies, but also creates a positive feedback loop in valuations: marginal earnings improvement plus investor attention drives sector valuations to recover from historical lows.
From a fundamentals perspective, the bottoming signal for the semiconductor cycle is already quite clear. After a deep correction in 2023, global semiconductor sales year-over-year monthly growth turned positive in the second half of 2024 and accelerated further in 2025. According to data released by the China Semiconductor Industry Association, domestic integrated circuit output in the first five months of 2025 rose more than 15% year over year, with design-sector revenue growing even faster. This pattern of both volume and price rising is the core logic behind early capital positioning.
4. Challenges and Opportunities: Key Variables for the Next Three Years
Despite the bright outlook, the semiconductor industry still faces challenges that cannot be ignored. First is geopolitical uncertainty: technology restrictions may extend from equipment to EDA software, high-end IP licensing, and even manufacturing services, and a break in any link of the supply chain could trigger a chain reaction. Second is the risk of overcapacity, especially in mature-node segments, where substantial new capacity will come online between 2025 and 2027. If end-demand falls short of expectations, price competition could erode corporate profits.
But the opportunities are equally significant. AI inference chips, automotive-grade MCUs, the RISC-V ecosystem, and advanced packaging (especially 2.5D/3D packaging) are all on the eve of a breakout. Taking Chiplet as an example, Chinese companies may use this path to bypass some process bottlenecks and rapidly iterate computing chips. In addition, the domestic localization rate for equipment and materials is still below 30%, leaving enormous room for import substitution. Once relevant companies achieve a breakthrough, they will enjoy a dual premium from higher penetration and localized pricing.
On the policy side, Phase III of the National Integrated Circuit Industry Investment Fund (Big Fund) was launched in early 2025, with a focus on advanced packaging, equipment materials, and AI chip design. Local governments are also offering tax incentives, talent subsidies, and industrial park support. This combined force of central and local policies will effectively lower the trial-and-error costs for startups and accelerate the commercialization of technological achievements.
5. Conclusion
In summary, the semiconductor industry is entering a new cycle driven by technological breakthroughs and capital resonance. On the technology side, heterogeneous integration, Chiplet, and third-generation semiconductors offer new paths for performance gains; on the supply-chain side, regionalized deployment has not curbed demand in the Chinese market; rather, it has created a window for domestic substitution; on the capital side, continued Southbound Stock Connect inflows into Hong Kong's technology sector signal international capital's recognition of China's semiconductor recovery.
For investors, semiconductors should no longer be viewed with a "buy the dip" mindset, but rather allocated with a long-term perspective of "positioning core assets and embracing industry trends." Focus on three areas: first, AI computing chips and their supporting advanced packaging; second, automotive-grade and industrial-control power semiconductors; third, domestic equipment and materials companies with breakthrough potential. For companies, the challenge is to balance scale expansion and risk control and find the right pace between technological breakthroughs and market execution.
The essence of the semiconductor industry is the combination of being innovation-intensive and capital-intensive. When technology and capital move in the same direction, China's semiconductor industry is expected to leap from "follower" to "peer" within the next three to five years. This is not only a national strategic necessity, but also an inevitable result of the rebalancing of the global technology supply chain.
