China's equity markets fell sharply on Thursday, while Hong Kong shares edged lower, as a global selloff in artificial intelligence-linked stocks triggered heavy losses in semiconductor and optical transceiver companies. According to Reuters, investors reassessed lofty valuations in the technology sector amid growing concerns over the sustainability of the AI-driven rally.The benchmark CSI300 Index dropped 2.2% by the midday break, while the Shanghai Composite Index declined 1.2%. In Hong Kong, the Hang Seng Index was little changed, slipping 0.03%, while the Hang Seng Tech Index fell 1.1%.The weakness mirrored a broader global retreat in AI-related stocks, with South Korea's technology-heavy Kospi index also suffering sharp losses. The decline prompted investors to reduce exposure to Chinese semiconductor and AI companies that had posted strong gains in recent months.Technology stocks bore the brunt of the selling pressure. China's telecommunications services sector, home to major optical transceiver manufacturers such as Eoptolink Technology and Zhongji Innolight, plunged 11% by midday. Sectoral indexes tracking semiconductor and AI companies also slumped about 8%.Zhongji Innolight, which made its Hong Kong trading debut on Thursday after raising HK$53.4 billion ($6.8 billion) in the city's largest initial public offering this year, fell more than 7% below its offer price, adding to the pressure on the broader technology sector.Despite the sharp decline in technology shares, investors rotated into defensive sectors. Liquor producers, consumer staples companies and banking stocks posted gains during the morning session, reflecting a shift toward relatively stable segments of the market.Analysts at China Asset Management said the recent weakness in technology stocks was largely driven by risks that had built up during the second quarter. They also noted that much of the valuation and trading risk had now been priced into the market, suggesting the correction may be entering a more stable phase.The broader market also remained under pressure. The Shenzhen Component Index fell 2.92%, the ChiNext Composite Index, which tracks China's startup-focused companies, tumbled 5.89%, while Shanghai's STAR50 Index, which represents technology-focused firms, dropped 6.34%.The sharp divergence between technology shares and defensive sectors highlights investors' growing caution as markets reassess AI-related valuations following a period of strong gains, even as analysts expect volatility to ease after the recent correction, Reuters reported.