Chinese semiconductor stocks are drawing growing scrutiny from investors after a sharp rally pushed valuations well above many global peers, raising concerns about overheating in the sector despite Beijing’s strong policy support for domestic chipmakers.According to Bloomberg, shares of Semiconductor Manufacturing International Corp. listed on the mainland are trading at more than 120 times forward earnings, while Hua Hong Semiconductor Ltd. commands a valuation of over 150 times earnings. By comparison, US chipmaker Intel Corp. and South Korea’s Hanmi Semiconductor Co. trade at around 95 times forward earnings.Market participants say the rally in Chinese chip shares has been driven largely by expectations surrounding China’s push for technological self-reliance and localization of semiconductor supply chains, rather than by earnings growth alone.Market experts as saying that valuation concerns are beginning to emerge across China’s broader chip sector, where premiums are increasingly tied to localization expectations and fears of a potential bubble are rising.The concerns resurfaced after Hua Hong Semiconductor reported first-quarter earnings that missed analyst estimates, while its second-quarter revenue guidance also fell short of expectations. The stock dropped more than 6% on Friday. SMIC also reported weaker-than-expected net income for the January-March quarter, though stronger selling prices helped gross margins beat forecasts. Its shares initially rose as much as 5.8% before trimming most of the gains.China’s aggressive efforts to build a self-sufficient semiconductor ecosystem have boosted investor appetite for domestic chipmakers. The country’s chip-focused STAR50 index climbed to a record high this week as enthusiasm surrounding artificial intelligence continued to fuel gains across Asian technology markets.Investors are also closely monitoring developments linked to US President Donald Trump’s visit to China, which includes a delegation featuring Jensen Huang, founder of Nvidia Corp.. Market participants are watching for possible agreements involving semiconductor access and rare-earth supplies.Chinese chipmakers could benefit significantly from domestic market expansion because overseas rivals may not have the same ability to compete in China’s local market. He added that investors are increasingly recognizing the sector’s value, especially amid a broader rally in semiconductor stocks across the US, Taiwan, South Korea and Japan.At the same time, signs of speculative excess are beginning to appear in mainland Chinese equities. Trading turnover has exceeded 3 trillion yuan for seven straight sessions, while margin financing balances have climbed sharply, pointing to crowded positioning in some of the market’s most popular trades.Chinese state-backed newspaper Securities Times this week warned investors about the risks of chasing stocks trading above 1,000 yuan per share, highlighting the possibility of stretched valuations and sudden outflows if market sentiment weakens.Shares of Yuanjie Semiconductor Technology Co., recently the most expensive stock on the mainland market, plunged more than 7% on Friday after reports that one of its executives had been detained over alleged criminal offenses.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)