On September 2nd, China's A-share market saw all three major indices close lower, with weak oscillating trading throughout the session, while the defense sector outperformed against the broader market downturn.

By the close, the Shanghai Composite Index fell 0.97% to 3,941.39 points, the Shenzhen Component Index dropped 1.88% to 13,611.55 points, the ChiNext Index declined 2.39% to 3,312.24 points, the STAR 50 Index slipped 1.82% to 1,617.60 points, and the Beijing Stock Exchange 50 Index bucked the trend with a 2.50% gain to 1,106.57 points. Total trading volume on the Shanghai and Shenzhen exchanges reached 1.791178 trillion yuan, shrinking by approximately 242.2 billion yuan from the previous session. Market breadth was notably negative, with 1,541 stocks advancing against 3,901 declining, while 55 shares hit the daily upper limit and 9 hit the lower limit, with advancers accounting for less than 30% of all listed stocks.

In terms of sector performance, ground weapons, aviation equipment, glass and fiberglass, education, tourism and scenic areas, and large state-owned banks led the gains. Meanwhile, crop farming, coke, energy metals, fishery, agricultural product processing, film and television, and minor metals were among the biggest decliners.

Key market drivers

The session's broad decline came as three major indices all closed in negative territory, with only the Beijing Stock Exchange 50 Index rising 2.50% against the trend. The Shanghai Composite Index, Shenzhen Component Index, ChiNext Index, and STAR 50 Index fell 0.97%, 1.88%, 2.39%, and 1.82% respectively. More than 3,900 stocks declined across the market, with advancers representing less than 30% of all listings. Two-market turnover stood at 1.791178 trillion yuan, contracting by roughly 242.2 billion yuan from the prior session.

The Beijing Stock Exchange 50 Index showed notable resilience, coinciding with the fifth anniversary of the announcement of the Beijing Stock Exchange's establishment on September 2nd.

The defense sector surged dramatically against the market downturn, with the ground weapons sub-index jumping 6.48% to rank first among all Shenwan second-level sectors. This rally was fueled by escalating geopolitical tensions in the Middle East—on September 1st (US Eastern Time), US forces launched a fresh round of strikes against Iran, with Tehran claiming to have shot down a US MQ-9 drone in retaliation.

Banking stocks also gathered strength, with Industrial and Commercial Bank of China and China Construction Bank hitting fresh record highs on a adjusted-price basis. Postal Savings Bank, Bank of Beijing, and Bank of Communications were among the top performers, and the large state-owned bank sub-index rose 0.57% on the day.

According to a recent research note from China Securities, the traditional defense sector has remained subdued for an extended period. However, with strengthening expectations for the 15th Five-Year Plan in the second half of the year and the approaching 100th anniversary of the People's Liberation Army in 2027, aircraft manufacturers and core supply chain companies are likely to witness a new round of stockpiling and order releases.

Hot sector analysis

1. Defense/Ground Weapons: The defense sector staged an impressive rally against the broader decline, emerging as the strongest theme of the day. Great Wall Military Industry, Jianshe Industry, and Inner Mongolia First Machinery (2 consecutive limit-ups) all hit the daily upper limit, while North Long Dragon surged over 13%. Far East Smarter Energy, Shenzhen Newstar, and Borum New Materials also hit their upper limits. The catalyst was the escalating Middle East conflict—US forces launched new strikes against Iran on September 1st, and Iran claimed to have shot down a US MQ-9 drone, intensifying market attention on drones, counter-drone systems, air defense and missile interception, and electronic countermeasures.

2. Power Grid Equipment: The sector closed slightly lower overall, though several individual stocks advanced against the trend. Sun Cable and Shenma Electric both hit their daily upper limits. Optical fiber concepts rallied during the session, with Hangzhou Cable touching its limit-up. PCB concepts remained active, with Wote New Materials achieving four limit-ups in five trading days.

3. Banks/Large Financials: Large state-owned banks outperformed, with Industrial and Commercial Bank of China and China Construction Bank setting new record highs on an adjusted-price basis. Postal Savings Bank, Bank of Beijing, and Bank of Communications led the gains, and the large state-owned bank sub-index rose 0.57% for the day.

Declining sectors

Crop farming, coke, energy metals, fishery, agricultural product processing, film and television, and minor metals recorded the steepest declines. Crop farming plunged 5.93%, coke fell 3.71%, energy metals dropped 3.44%, fishery slid 3.29%, agricultural product processing declined 3.16%, film and television lost 3.10%, and minor metals shed 3.07%. Agricultural stocks were broadly hit, with Dunhuang Seed and Guotou Fengle hitting their daily lower limits, while Shennong Seed, Hualv Bio, and Nongfa Seed fell sharply. The previously strong agriculture sector experienced a concentrated pullback, highlighting clear sector rotation in the market.