Policies have been implemented beyond expectations, leading to a rapid rise in A-shares, with trading volumes continuously setting new records and foreign capital continuously increasing its investment in Chinese assets. Even after the significant increase, the overall valuation of A-shares remains relatively cheap, and the market is now waiting for the effects of the policies to become apparent.
The Politburo meeting at the end of September and the press conferences held by major ministries and commissions have sent out a strong policy signal, igniting market enthusiasm. From September 24th to 30th, in just five trading days, the Shanghai Composite Index surged by 21.3%, entering a "technical bull market," and trading volumes significantly increased. On September 30th, the trading volume of the Shanghai and Shenzhen markets reached a record high of 2.59 trillion yuan.
During the National Day holiday, when A-shares were closed, international funds continued to aggressively add positions in Chinese assets, fearing to miss out on this "feast." From October 1st to 7th, the Hang Seng Index rose by about 9.3%, and the FTSE China A50 Index futures increased by nearly 14%. The number of open contracts for the FTSE China A50 Index futures on the Singapore Exchange has soared to a record high of 1.2 million contracts. Against the backdrop of a 2% appreciation of the US dollar index, the renminbi exchange rate remained strong.
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After the National Day holiday, A-shares continued their strong attack. On October 8th, the Shanghai Composite Index once reached 3,674.4 points, with the trading volume of both markets exceeding 3.45 trillion yuan, setting a new record high. Since 2024, as of October 8th, the Shanghai Composite Index has risen by 17.3%, and the CSI 300 Index has increased by 24%, leading the global major markets.
Foreign institutions are also actively bullish on Chinese assets, with Goldman Sachs and Citigroup significantly raising their targets for A-shares and Hong Kong stocks. Global allocation funds seem to be reducing their positions in the Indian stock market and turning to Hong Kong and A-shares.
The current market consensus is that the policy level has placed greater emphasis on stable growth. After a series of monetary policies and real estate policies are introduced, there is an expectation for further fiscal policy efforts to form a synergistic policy effect. However, there are some disagreements in the market, such as how much room is there for further interest rate cuts? How much financial support will the central bank provide to support the stock market? How large will the subsequent fiscal policy efforts be?
Although A-shares have risen significantly in the short term, their overall valuation remains relatively cheap. If the effects of subsequent policies gradually become apparent and promote faster economic recovery, the market still has a significant upward space. However, it takes a certain amount of time for the policy implementation to improve the economic fundamentals, especially when the market has risen significantly in the short term. Investors should be more calm and discerning, and those sectors that benefit from the policies and have a solid fundamental basis are expected to win in the long term.
Foreign capital increases its investment in Chinese assets
In recent years, under the Federal Reserve's interest rate hike cycle, foreign capital was not optimistic about Chinese assets, and they flocked to markets such as India and Japan. However, the attitude of foreign institutions has recently undergone a significant change, and they are now bullish on Chinese assets.
Goldman Sachs believes in its latest research report that if China's economic support policies continue to follow up, Chinese assets have the potential for further valuation recovery. From experience, there is a good correlation between fiscal easing and valuation expansion. If the economy responds to the policy, profit growth may improve from the current conservative forecasts, which also tends to support valuation expansion. The Chinese stock market has been upgraded to "overweight," with the target price for the CSI 300 Index increased from 4,000 points to 4,600 points, and the insurance and other financial sectors have been upgraded to overweight.Ray Dalio, the founder of the world's largest hedge fund Bridgewater Associates and a deep researcher on the global debt crisis, recently expressed his view that "this is a perfect deleveraging with Chinese characteristics." Dalio compared China's recent policies to those of the European Central Bank in 2012 that resolved the European debt crisis, stating that "this is a very important week, which could be recorded in the annals of market economy history, much like the ECB's 'whatever it takes' in 2012."
Dalio further indicated that by designing a "perfect deleveraging" to properly address debt issues, the burden of debt can be reduced or dispersed within an acceptable range, thus preventing China from falling into a debt crisis and vibrantly enhancing productivity.
Citi has also joined the ranks of those actively bullish on A-shares, believing that even after the recent significant rebound, A-shares still have tremendous potential for growth, and the valuation of Chinese assets remains cheap compared to other emerging markets. Citi recently raised its Hang Seng Index target for the end of June 2025 by 24% to 26,000 points and set the target for the end of 2025 at 28,000 points; it also adjusted the target for the CSI 300 Index for the first half of 2025 to 4,600 points and for the end of 2025 to 4,900 points.
The positive outlook on Chinese assets has even spilled over to other markets such as India. As the funds allocated to global stock markets can be considered fixed in the short term, the influx of foreign capital into Chinese assets will inevitably reduce positions in other markets. The Indian Nifty Index fell by 4.5% last week (from September 30 to October 6), marking the worst weekly performance since June 2022. The improvement in the Chinese market's performance and more attractive valuations are the main reasons for the recent withdrawal of foreign capital from the Indian stock market.
Morgan Stanley believes that new retail investors are the main driving force behind the stock market's rise, with a significant increase in the number of accounts opened by new investors, indicating a rising level of retail participation. If the allocation of stocks in Chinese household assets returns to the levels of 2020-2021, there could be an inflow of 2 trillion to 3 trillion yuan into the stock market.
CICC, when analyzing the inflow of foreign capital, pointed out that at the beginning of the rebound, the main forces were passive funds (such as ETFs) and trading funds (hedge funds); after the market continued to rise, passive funds remained the main inflow, with trading funds showing short covering, and active funds also began to flow in. CICC calculated that if active funds overall shift from underweight to benchmark weighting, it could bring in about $74 billion in the long term.
Market Consensus and Expectations
The current market consensus is that the strength of this policy to stabilize growth has exceeded expectations. The Politburo meeting on September 26 stated, "We must view the current economic situation comprehensively, objectively, and calmly, face difficulties, strengthen confidence, and effectively enhance the sense of responsibility and urgency in doing economic work. We must focus on key points, take initiative, effectively implement existing policies, and vigorously introduce additional policies to further improve the targeted and effective nature of policy measures, striving to complete the annual goals and tasks of economic and social development."
In terms of specific policy directions, the Politburo meeting emphasized the need to increase the counter-cyclical adjustment efforts of fiscal and monetary policies; to promote the stabilization and recovery of the real estate market; and to strive to boost the capital market.
The rise in this round of the market has been very abrupt and beyond the expectations of most investors. CICC believes that the starting point of this round of the market's movement comes from the transformation of policy and expectations, but it is also amplified by sentiment and the assistance of "short squeezes." During the National Day holiday, as the market further rebounded significantly, the short transactions and proportion of Hong Kong stocks noticeably declined, and the market's surge forced long-term funds that were previously "underweight" to also increase their positions, reducing their underweight to prevent falling too far behind.Currently, monetary policy, real estate policy, and capital market policy have already exerted significant force, and the market's focus has shifted to whether these policies will continue to intensify, especially how much additional fiscal policy can be implemented?
Why do people have high expectations for fiscal policy? Although monetary policy and fiscal policy are both macroeconomic policies, they have some differences in their impact on the economy. The effect of monetary policy on the economy is relatively indirect; it often stimulates individual consumption and corporate investment by reducing the cost of capital. The strength of its effect depends on the sensitivity of individuals and companies to interest rates. If the balance sheets of individuals and companies are damaged, they will become less sensitive to interest rates, and the time for monetary policy to reach the real economy may be prolonged.
Fiscal policy, on the other hand, has a more direct impact on the economy and has an advantage in stabilizing overall demand. Expanded fiscal spending will directly translate into an increase in the economy. Duan Chenju, the research director of China Life Security Fund Management Co., Ltd., believes that during periods of significant balance sheet pressure, residents and companies find it difficult to expand counter-cyclically, while the expansion of fiscal expenditure can directly create overall demand, making counter-cyclical policies more efficient.
When market trends are more urgent, we still need to maintain an objective and calm attitude, and there may still be some uncertainties in the short term. GF Securities believes that the low nominal growth in the third quarter will bring some short-term pressure on corporate profits for that quarter; the market's consensus on this round of market trends is relatively strong, which may lead to some assets being irrationally valued to a certain extent; overseas markets are in a relatively fragile balance in both the "numerator" and the "denominator," and there are still some uncertainties in the future.