The central bank introduces new tools to support the stock market, depositors resell large-denomination certificates of deposit, and foreign capital flows back to China... Under a series of favorable policies, market funds gradually become active.

No one expected that the bear-bull switch of the Chinese stock market would only take the time of a press conference.

On September 24th, A-shares and Hong Kong stocks ushered in a long-awaited surge. The single-day increase of the A-share Shanghai Composite Index reached 4.15%, and the Hang Seng Index in Hong Kong rose by 4.13%. A report from Goldman Sachs' institutional brokerage department showed that Chinese stocks recorded the largest single-day net purchase since March 2021, the second-highest level in the past decade.

Accompanying the Chinese stock market's synchronized progress is the increased activity of market funds.

On October 10th, the People's Bank of China (hereinafter referred to as "the central bank") announced that it has decided to create the "Securities, Funds, and Insurance Companies Swap Facility" (hereinafter referred to as SFISF), and from now on, it will accept applications from qualified securities, fund, and insurance companies. The first phase of the operation will be 500 billion yuan, and the scale of operations can be further expanded depending on the situation. The funds obtained from this tool can only be used to invest in the stock market.

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The next day, media reports said that CICC and CITIC Securities had submitted their plans, with CITIC Securities applying for an amount of about 10 billion yuan. An informed source said that the current SFISF has indeed started to accept application materials, but it will take some time to further implement it.

Not only that, but another capital market support tool announced by the central bank earlier, the "Special Re-lending for Equity Increase and Repurchase," has also entered the material collection stage. It has been learned from various sources that some state-owned large banks have already taken action.

"On Wednesday (October 9th), when the market was facing adjustment pressure and participants' concerns about the subsequent liquidity of the stock market intensified, the central bank issued an announcement at 8 am on Thursday, introducing the swap convenience tool, clearly releasing a signal to maintain the healthy development of the financial market." Minsheng Securities Chief Economist Tao Chuan wrote.

Looking back to September 24th, at a press conference held by the State Council Information Office, the governor of the central bank, Pan Gongsheng, emphasized that the central bank will firmly adhere to a supportive monetary policy stance, increase the intensity of monetary policy regulation, and release the aforementioned two new tools to support the stock market.Two tools supporting the stock market have initial quotas of 500 billion yuan and 300 billion yuan, respectively, with the possibility of expansion depending on the situation. "The first phase is 500 billion yuan, and there could be another 500 billion yuan, or even a third 500 billion yuan; the first phase is 300 billion yuan, and there could be another 300 billion yuan, or even a third 300 billion yuan, all of which are possible," said Pan Gongsheng.

"In the past, the central bank has been strictly guarding against and restricting credit funds from entering the market. This time, the sudden introduction of a structural monetary policy tool directly targeting the capital market has come as a surprise to everyone," said Guan Tao, Chief Global Economist at BOC Securities. "President Pan said that if used well, the scale could be increased depending on the situation, which reminds everyone of 2012 when the then President of the European Central Bank, Draghi, publicly stated 'whatever it takes to defend the euro'."

On the day of the press conference, both A-shares and Hong Kong stocks surged, marking the beginning of the "9·24" market trend. Wind (Wangde) data shows that from September 23 to 27, the Shanghai Composite Index, Shenzhen Component Index, and ChiNext Index of A-shares rose by 12.81%, 17.83%, and 10%, respectively; the Hang Seng Index of Hong Kong stocks rose by 13%.

Under the favorable policy, market funds in domestic deposits and financial management began to become active. In mid-September, large-denomination certificates of deposit with an annual interest rate of 3% were hard to find, but by the end of September, there was a 180-degree turn, and a wave of transfers occurred.

At the same time, as the Federal Reserve's interest rate cut took effect, global liquidity also quietly shifted.

"Currently, global asset allocators have not yet seen a significant inflow of funds into emerging markets, with the main funds rotating within emerging markets, and some have reduced positions in markets such as India and South Korea," said Meng Lei, Equity Strategy Analyst at UBS Securities China. "Moreover, it is even more important to pay attention to the Federal Reserve's monetary policy and changes in the U.S. market. After the Federal Reserve's interest rate cut, liquidity began to be released. However, to encourage investors to invest in emerging markets rather than the U.S., the market needs to offer higher investment returns."

On the first working day after the National Day holiday (October 8), A-shares opened 10% higher, reaching 3,674 points, with nearly a thousand stocks hitting the daily limit up.

Twenty minutes after the market opened, the transaction volume of the Shanghai and Shenzhen stock markets exceeded 1 trillion yuan; 72 minutes later, it broke through 2 trillion yuan. By the end of the trading day, the transaction volume of the Shanghai and Shenzhen stock markets exceeded 3.4 trillion yuan, setting a new historical record and far exceeding the transaction volume of the U.S. stock market during the same period.

It is worth noting that as the stock market rose rapidly and significantly, financial regulatory authorities began to issue risk warnings.

Xu Zhong, Vice Chairman of the National Association of Financial Market Institutional Investors, emphasized in an article that "swap facilities" do not involve the issuance of base money during implementation, there is no "balance sheet expansion," and it is not the so-called "central bank entering the market"; "stock buybacks and increased loans" also do not represent bank funds entering the stock market.At the same time, financial regulatory authorities have provided window guidance to commercial banks, requiring financial institutions to place great emphasis on investor appropriateness management and investor protection, strengthen internal controls and compliance management, and strictly control leverage. Bank credit funds are strictly prohibited from entering the stock market in violation of regulations.

After the A-share market surged on October 8th, the increase gradually narrowed to within 5%, while the Hong Kong stock market fell by 9.41%, giving back all the gains made during the National Day holiday. Since then, A-shares and Hong Kong stocks have continued to adjust. As of the close on October 11th, the Shanghai Composite Index of A-shares approached 3,200 points, and the Hang Seng Index of Hong Kong stocks fell from a high above 23,000 points to near 21,000 points.

Is the "9·24" market trend a flash in the pan or the starting point of a bull market? Industry insiders believe that it is also necessary to remain calm and prudent when market liquidity shifts.

Two tools to support the stock market: the first phase releases 800 billion yuan

In the "9·24 market trend", the two structural monetary policy tools introduced by the central bank for the first time to support the stock market have attracted high attention.

On October 10th, the central bank announced the creation of the SFISF, marking the landing of China's first monetary policy tool to support the capital market.

It is reported that the SFISF is used to support qualified securities, fund, and insurance companies, using bonds, stock ETFs, Shanghai-Shenzhen 300 constituent stocks, and other assets as collateral, to exchange for high-grade liquid assets such as national bonds and central bank bills from the central bank. The first phase of the swap facility operation is 500 billion yuan, and the funds obtained through the tool can only be used for investment in the stock market, and the operation scale can be further expanded depending on the situation.

According to sources close to the central bank, the term of the SFISF does not exceed one year, and it can be applied for renewal upon expiration; the range of collateral may be expanded in the future depending on the situation. The flexibility of these operations indicates that the tool will have a great room for development in the future. It is understood that the central bank will carry out operations through specific primary dealers, and by observing the list of primary dealers, it may be the China Bond Credit Enhancement Company.

"The swap facility tool is mainly aimed at qualified securities, fund, and insurance companies. Considering that in the current central bank's open market operations, there are only two securities companies in the list of primary dealers." Tao Chuan said, "So even if the tool is put into use, it may be limited to the top securities, fund, and insurance companies, and will not cover all non-bank institutions."

According to observations, in the list of primary dealers in the central bank's open market operations, the only two securities companies are China International Capital Corporation and CITIC Securities. According to media reports, both have submitted relevant plans.The enthusiasm of institutions in applying for the use of SFISF is influenced by a multitude of factors. Among them, internal factors such as the liquidity status of the institution itself, judgment on the investment value of the capital market, risk control and compliance requirements, and external factors such as the fee rate of SFISF. Zhang Xu, Chief Fixed Income Analyst at Everbright Securities, stated this.

It is worth noting that previously, some opinions believed that SFISF implies "the central bank entering the market" or quantitative easing. In response to this, Guan Tao said in an interview that SFISF is a "bond-for-bond" exchange, institutions cannot directly obtain funds from the central bank, it does not directly affect the central bank's base money supply, and the related risks are still borne by the institutions.

Another new tool, "Equity Repurchase and Increase Special Re-lending," aims to guide commercial banks to provide loans to listed companies and major shareholders for the repurchase and increase of listed company stocks. For loans issued by commercial banks, the central bank will provide 100% re-lending fund support. The initial quota is 300 billion yuan.

A person from a joint-stock bank said, "High-quality listed companies are definitely business opportunities, commercial banks have a certain enthusiasm for this tool, but it is still unclear how to implement it and the details of the operation."

As early as September 25, a joint-stock bank had internally issued a notice to carry out the marketing work of the "Equity Repurchase and Increase Special Re-lending" business.

According to the obtained documents, based on relevant rules and market conditions, the bank has determined the term of the equity repurchase special loan and the equity increase special loan to be no more than three years in principle. In terms of price, according to the central bank's previous disclosure, the interest rate of this re-lending tool is 1.75%, while the loan interest rate issued by commercial banks to customers is around 2.25%. For customers, the bank will prioritize supporting customers included in its listed company whitelist; for stock increase loans, it will prioritize stocks with stable market value, active secondary market trading, good liquidity, and included in the CSI 300, CSI 500, CSI 1000 and other indexes.

On October 8, BaiRen Medical (688198.SH), a listed company on the A-share STAR Market, announced that in response to the central bank's policy guidance, the company's controlling shareholder and actual controller, Jin Lei, plans to use his own or self-raised funds to increase his holdings in the company's stocks by no less than 100,000 shares. On that day, BaiRen Medical's stock price was capped at the daily limit, with a gain of 20%.

In addition, according to a report by Securities Times, at the aforementioned press conference, Pan Gongsheng said that the stock market stabilization fund is under study. The so-called stabilization fund is a fund established by the government or related institutions to stabilize the market when the market cannot self-repair. It mainly stabilizes the market by buying and selling securities, acting as a direct market stabilizer. This is an unconventional market rescue measure taken by the government.

Some opinions believe that it was after the release of this news that A-shares and Hong Kong stocks saw a significant rise.

Two days later, on September 26, the Political Bureau of the CPC Central Committee held a meeting to analyze and study the current economic situation and deploy the next step in economic work. Many analysts said that the Central Political Bureau meeting held on July 30 had already deployed the economic work for the second half of the year. After two months, the Political Bureau meeting once again deployed economic work, which is not common in the past.The meeting emphasized the need to increase the counter-cyclical adjustment intensity of fiscal and monetary policies. Regarding the capital market, the meeting stated that efforts should be made to boost the capital market. At the same time, the meeting explicitly proposed for the first time to promote the stabilization and recovery of the real estate market.

Guan Tao said, "The Central Political Bureau meeting on September 26 proposed 'to strive to boost the capital market', compared with the 'enhance the inherent stability of the capital market' mentioned at the Central Political Bureau meeting on July 30, the goal is clearer, reflecting the high attention of the decision-making layer to the capital market."

"We should not only look at the stance of the central bank, but also see that the attitude of the decision-making layer towards the capital market and real estate has undergone a fundamental change in the public report of the Central Political Bureau meeting," said Li Xunxian, Chief Economist of Zhongtai International, in an interview.

The day after the meeting, a comprehensive reduction of reserve requirements and interest rates was implemented.

The central bank announced that the reserve requirement ratio for financial institutions was reduced by 0.5 percentage points, releasing 1 trillion yuan in long-term liquidity. Pan Gongsheng said that by the end of the year, depending on the market liquidity situation, the central bank may further reduce the reserve requirement ratio by 0.25 to 0.5 percentage points.

In terms of policy interest rates, the interest rate for the 7-day reverse repurchase operation in the open market was adjusted from the previous 1.70% to 1.50%, with a reduction of 20 basis points (BP), and the single reduction amount was the largest since 2021. It is expected to lead to a reduction of about 30 BP in the Medium-term Lending Facility (MLF) interest rate, thereby guiding the Loan Prime Rate (LPR), deposit interest rates, etc., to follow down by 20 BP-25 BP.

In addition, on the evening of September 29, the central bank announced four financial support policies for real estate in one breath, including a unified reduction in the interest rates of existing mortgages and the optimization and adjustment of the mortgage interest rate pricing mechanism. That night, the three cities of Shanghai, Guangzhou, and Shenzhen relaxed the real estate market overnight, announcing measures to relax or even cancel the purchase restrictions on the real estate market.

On the day of the implementation of the reduction of reserve requirements and interest rates, A-shares and Hong Kong stocks continued to open high and go high. During this period, there was an abnormality in the transaction confirmation of stock competitive trading on the Shanghai Stock Exchange, and the market joked that the system was "squeezed out by the stock market boom."

"The transaction that day was not only congested, but completely unable to trade, which showed that the exchange host was impacted and crashed," said a stock trader, adding that the transaction volume in the following days was even greater than the pressure test volume after the crash.

Wind (Wangde) data shows that from September 25 to October 10, A-shares' single-day transaction volume exceeded 1 trillion yuan for seven consecutive trading days. Among them, on October 8-9, the transaction amount of A-shares was 3.48 trillion yuan and 2.97 trillion yuan, respectively, both exceeding the transaction amount of US stocks during the same period.From a market value perspective, as of the end of September, the total market value of the A-share markets in Shanghai and Shenzhen reached 84.28 trillion yuan, an increase of over 14 trillion yuan compared to the end of August.

Large deposit certificates transfer by depositors: A transfer wave appeared at the end of September

Under the influence of the money-making effect, deposits and financial management funds once rushed into the market.

In mid-September, large deposit certificates with an annual interest rate of 3% were hard to find, but by the end of September, there was a 180-degree turn, and a transfer wave occurred.

After the market closed on the afternoon of October 9, there were nearly 200 transfers of 5-year large deposit certificates with an interest rate of 3.15% in the transfer area of a private bank's mobile app. The remaining terms of these products are mostly more than 4 years and 11 months, and the depositors have held them for less than 1 month.

In the transfer areas of some joint-stock banks, a large number of large deposit certificates to be transferred also appeared. "I wanted to pick up a leak before, but there were few transfer certificates, and there was no opportunity. Now the number of certificates has increased several times," said a depositor.

Some depositors are even willing to sacrifice part of the interest to transfer the certificates. Some media reported that the calculated annual interest rate of the transferred large deposit certificate is as high as 6.92%. The certificate details show that the principal of this certificate is 300,000 yuan, with an annual interest rate of 3.55%, and the term is 3 years (from November 29, 2021, to November 29, 2024). Now, depositors are willing to pay high interest in advance and transfer at 328,700 yuan.

In the transfer service area of large deposit certificates of state-owned large banks, large deposit certificates with a 3% interest rate are also common. At present, the interest rate of three-year large deposit certificates issued by state-owned large banks is about 2.15%, and the difference between the two is at least 85BP (basis points).

Why did large deposit certificates go from being hot to "lonely" in a very short time? In the view of Xue Hongyan, the vice president of Xingtu Financial Research Institute, it is very related to the sharp rise in the stock market and the increase in attractiveness. From the perspective of deposits alone, considering that a new round of deposit interest rate cuts is imminent, it is irrational to transfer large deposit certificates before the rate cut. The only reasonable explanation is to change the use of funds, and the funds obtained from the transfer of certificates will no longer buy new deposits. From the perspective of asset allocation, only the expected return on equity assets has increased sharply recently, so it can be reasonably inferred that after the funds flow out of large deposit certificates, they are likely to flow into the capital market.

"Under the background of continuously declining interest rates, such a sign is indeed abnormal. Since the deposit data of commercial banks are updated monthly, it is currently impossible to see the full amount of deposit data changes, but it is speculated that it should be closely related to the entry of funds into the stock market," said Zhou Yiqun, a senior expert in financial regulation.According to data from Industrial and Commercial Bank of China (ICBC), on September 27th, its silver certificate transfer net value index soared to 7.04, reaching a three-and-a-half-year high since 2021. The index is defined as the ratio of the net amount of funds transferred from ICBC accounts to the securities market on the corresponding trading day to the average daily net amount of funds transferred from ICBC accounts to the securities market in 2017, which intuitively reflects the net amount of funds transferred to the securities market by all ICBC investors on the trading day. "This also directly indicates that a large amount of capital is rushing into the market," said Zhou Yiqin.

Based on the data monitored by the Rong360 Digital Technology Research Institute, in August 2024, the average interest rates for large-denomination certificates of deposit with a maturity of 3 months was 1.62%, 6 months was 1.81%, 1 year was 1.91%, 2 years was 2.12%, 3 years was 2.43%, and 5 years was 2.39%. Compared to the previous month, the average interest rates for large-denomination certificates of deposit of all maturities have fallen, with a drop of 4.8 basis points for the 3-month term, 6.5 basis points for the 6-month term, 9.9 basis points for the 1-year term, 14.9 basis points for the 2-year term, and 9.3 basis points for the 3-year term.

Furthermore, according to the "China Banking Wealth Management Market Semi-Annual Report (2024 H1)" released by the Banking Wealth Management Registration and Custody Center, as of the end of June 2024, the scale of the banking wealth management market was 285.2 trillion yuan, with a total of 15,400 new wealth management products issued in the first half of the year, raising funds of 336.8 trillion yuan, and the average return rate of wealth management products in the first half of the year was 2.80%.

The scale of banking wealth management has also significantly decreased. According to data from Puyi Standard, as of September 30th, the scale of banking wealth management products reached 292.7 trillion yuan, a decrease of 782.6 billion yuan from the end of August. The reduction in wealth management scale since September has a seasonal factor, as wealth management returns to bank deposits at the end of the quarter.

However, since October, the wealth management scale has continued to decrease, which is contrary to the growth in wealth management scale in previous years. Data from China Merchants Securities shows that from September 29th to October 6th, the wealth management scale decreased by 67.7 billion yuan.

"At the end of September, after a series of policies to boost the economy were introduced, the equity market sent positive signals, and the stock market soared," said an industry analyst. Capital has flowed from the bond market to the stock market, causing some adjustments in the bond market, and bank wealth management, which mainly allocates fixed-income assets, has also been affected, with product returns declining. Bank wealth management may face certain pressures in the short term.

At the institutional level, on October 8th, China Post Wealth Management stated that the stock-bond seesaw effect has re-emerged, and the bond market has undergone frequent adjustments due to multiple factors, leading to a retracement in the net value of wealth management products. At this time, allocating wealth management products that include a mix of stocks and bonds can, on the one hand, buffer the impact of bond market fluctuations to a certain extent, and on the other hand, share the opportunities for the equity market to rise.

On the same day, Ping An Wealth Management announced that due to the amount of advance payment reaching the set total advance payment amount (i.e., the total amount of customer fast redemption applications exceeds the limit), the fast redemption service for cash management wealth management products under Ping An Bank's agency sales by Ping An Wealth Management will be suspended immediately, and it is expected to return to normal no later than 00:00 on October 9th, 2024.

Foreign capital is also flowing back into the Chinese stock market. Choice data shows that on September 30th, the northbound capital of A-shares exceeded 300 billion yuan in transaction volume; on October 8th, the northbound capital transaction volume broke through 500 billion yuan again, setting a historical record. Northbound capital refers to international capital entering A-shares through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect channels.In terms of Hong Kong stocks, according to Huafu Securities' calculations, since the middle and late September, international capital inflows into Hong Kong stocks have reached 39.6 billion Hong Kong dollars, exceeding the 20.5 billion Hong Kong dollars of southbound capital. Southbound capital refers to mainland capital entering Hong Kong stocks through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect channels.

For foreign capital flowing into Chinese equity assets, the market mainly divides it into two categories: one is the "hedge funds" that engage in short-term trading; the other is long-term investment capital, which is also known as "long only" capital, implying a long-term perspective.

"The increase in foreign capital inflows into A-shares is closely related to the rise in their valuations. In terms of Hong Kong stocks, the first wave of increases was mainly driven by short covering by hedge funds. Subsequently, as the valuations of Hong Kong stocks continued to rise, more and more foreign capital chased the increases," said Meng Lei, a China equity strategist at UBS Securities.

After the Chinese government introduced a package of stimulus policies, A-shares and Hong Kong stocks have been advancing strongly. On September 25, a broad rally occurred in the Shanghai, Shenzhen, and Beijing markets, with more than 4,100 stocks rising. On September 30, the turnover of the Wind All A-share Index exceeded the 2 trillion yuan mark for the first time since June 2015. From September 30 to October 7, the Hang Seng Index in Hong Kong soared from 21,175 points to 23,099 points, a gain of 9.09%.

According to CICC calculations, from September 26 to October 2, A-shares saw an inflow of $2.64 billion in passive foreign capital, while Hong Kong stocks and ADRs (American Depositary Receipts) saw an inflow of $2.87 billion, three to four times the scale of the previous week, setting a new high since 2016.

For the trend of hedge fund capital, securities firms are an important observation window because hedge funds are their most important customers. "Although hedge funds only account for 20% of the total foreign capital scale, they account for nearly 80% of the total transaction volume. Hedge funds are good at using leverage and are the main force in trading," said Meng Lei.

For "long only" long-term capital, the capital recently invested in China has also been increasing. "After the Chinese stock market rose, many long-term funds have increased their interest in Chinese assets. Many funds hesitated and could not buy Chinese stocks with great valuation appeal because the trading was too crowded and the prices rose too quickly," said Bao Xiadong, the emerging market investment manager at Edmond de Rothschild Asset Management.

Such enthusiasm had already been sown in the summer. At that time, Bao Xiadong returned from Paris to conduct research in China and unexpectedly met with a group of overseas long-term value investors such as Polaris Capital, Vontobel, and Franklin Templeton.

CICC data shows that in the week ending October 5, after 65 consecutive weeks of outflows, overseas active capital turned into net inflows for the first time. That week, overseas active funds flowed into A-shares by $190 million and into Hong Kong stocks and ADRs by $120 million. Active foreign capital accounted for 80%, far greater than passive capital, and therefore more important and more representative of long-term institutional investors.

The holding period of long-term foreign capital is calculated in years, and a short-term increase in valuation is not the main reason for increasing positions in China. In the view of Xu Ligao, the China equity fund manager of the emerging market equity team at Franklin Templeton, long-term capital pays more attention to the fact that after the government introduced policies to improve financing costs, real estate, and the capital market, China's real estate industry is expected to stop falling and warm up, and consumer potential will be gradually released."Actually, a few years ago when the Hong Kong stock market was sluggish, our LPs (Limited Partners) never redeemed the fund, because they were optimistic about the future potential of China's economy," said Xu Ligao. "After the stimulus policies were introduced, the first concern of foreign capital was in the real estate sector. If real estate stabilizes, it will bring a certain wealth effect, as most of the assets of Chinese residents are in real estate. Then, foreign capital's focus will be on whether this effect will increase China's consumption. Overall, foreign capital still welcomes these policies."

From the perspective of European capital, long-term funds' LPs are mostly pension funds, private banks, high-net-worth clients, etc. Bao Xiadong said that the Chinese government's introduction of stimulus policies this time is as strong as a Bazooka rocket launcher. "Our clients are not in and out quickly. We are more concerned about the details and sustainability of the stimulus policies, as well as their impact on the fundamentals and corporate profits."

In terms of capital flows, Wind data shows that in the past 60 days, Zijin Mining has been the stock with the most net purchases by the Shanghai-Hong Kong Stock Connect, amounting to 2.082 billion yuan. In addition, financial stocks such as Huatai Securities, Ping An Bank, and Ping An Insurance are also favored. However, as stock market valuations fall, some new energy stocks have also been sold by foreign capital. For example, CATL has been the stock with the most net sales by the Shanghai-Hong Kong Stock Connect in the past 60 days, reaching 4.85 billion yuan.

In Xu Ligao's view, long-term capital focuses more on the long term. Regarding the current highly volatile new energy stocks, he believes they still have investment value. "New energy connects two sides, one side is environmental protection, and the other side is industrial upgrading. Currently, China's development in the energy and industrial chain is relatively comprehensive. After the supply gradually clears, the industry begins to reshuffle, and then the leading positions in the new energy industry become more stable, which has become a better investment target. Globally, Chinese new energy companies have obvious advantages in technology and costs," he said.

He also said that the main issues for long-term foreign capital focusing on the Chinese market are twofold: First, whether real estate can stabilize and not drag down economic growth; second, which industries can take over real estate and become the driving force for future economic growth. The development of new energy and emerging manufacturing industries is an important clue to this issue.

In terms of Hong Kong stocks, during the four trading days of the National Day holiday, the non-bank financial, media, and banking sectors ranked among the top three in terms of institutional capital purchases in Hong Kong stocks.

Looking at the details, in the non-bank financial sector's purchase turnover, insurance has the highest purchase turnover, higher than the total of diversified finance and securities. In the media and banking sectors, social industries represented by Tencent and Weibo, as well as the transaction volumes of state-owned large banks, rank at the top.

In Bao Xiadong's view, "white horse stocks" such as Tencent have always been foreign capital's "favorite" investment in China. They meet several major principles of foreign investment: high corporate transparency, easier-to-understand shareholder structure, fundamental changes that can be mapped to corporate profits, and a certain moat.

"Internet giants like Tencent will inevitably slow down in growth, but for us, buying such stocks at this valuation is actually value investment," he said. "Such stocks make us more at ease because they will repurchase shares. This not only reflects their stable cash flow but also increases shareholder returns."

However, with changes in valuation, transactional foreign capital once again net outflows from Hong Kong stocks. According to Huatai Securities' estimates, there was a net outflow of $726 million from September 26 to October 2."In the current market environment, we can tolerate a certain level of volatility. Previously, the valuations of A-shares and Hong Kong stocks were relatively low. If the economy improves, we anticipate that investing in the Chinese market could yield better returns than other emerging markets, and even India," said Bao Xiadong.

This reflects the perspective of foreign capital allocation in China—global liquidity. That is, whether to allocate to the Chinese market depends on comparing the yield rates with those of Asian emerging markets and the U.S. market.

According to Meng Lei, currently, the funds of global asset allocators investing in emerging markets have not yet significantly flowed in. The main funds are rotating within the emerging markets themselves. Some have reduced positions in markets such as India and South Korea, with valuations and relative market performance being the main reasons for the rotation.

Data from the Securities and Exchange Board of India shows that in the week ending October 6, the Indian stock market experienced the largest net selling by global funds since 1999.

However, Bao Xiadong holds a different opinion on the above view. "Firstly, foreign capital has a weaker say in the Indian market. The amount of money from domestic retail and institutional investors buying stocks in India far exceeds the amount of foreign capital selling. Secondly, many Indian companies are preparing for IPOs (initial public offerings). After making profits in the Indian market, foreign capital still hopes to participate in new listings in that market, which means foreign capital may still remain in India."

In Meng Lei's view, compared to within the Asian market, U.S. monetary policy and market changes are more important. After the Federal Reserve entered the interest rate reduction channel, liquidity began to be released. Investors investing in emerging markets need to have higher returns than in the United States. "In the future, to attract more funds to flow into the Chinese market, it cannot rely solely on the rotation of funds, but also needs more European and American capital to subscribe to Chinese investment funds," he said.

Liquidity Shifts to Risk: How to Connect Subsequent Funds

In Meng Lei's view, retail investors, insurance capital, and foreign capital are all increasing their positions in the Chinese stock market. "Although there is no exact high-frequency data at present, it can be observed from some side angles."

Many analysts have said that retail investors are an important increase in funds entering the market recently because the enthusiasm for new account openings is relatively high at present.During the recently concluded National Day holiday, several securities firms announced that their business departments would operate normally to facilitate clients in handling some securities transactions and to support 7x24 mobile account opening. Many securities account managers indicated that the account opening business has been booming recently. "The number of accounts opened in a day is more than what was opened in the previous month," they said.

According to media reports, by the evening of October 8th, a leading securities firm had over 300,000 new accounts pending review. An unnamed securities industry insider mentioned that all securities firms are experiencing a surge in account openings, and it's not unusual for large firms to add 100,000 new accounts recently.

On the first day after the National Day holiday (October 8th), the Industrial and Commercial Bank of China's securities transfer net value index soared to 54.88. On that day, the A-share transaction volume exceeded 3.45 trillion yuan, setting a historical record. According to calculations by the UBS quantitative team, the participation of retail investors in A-share trading has returned to the high point of 2021.

Statistics from CITIC Securities show that on September 30th, the A-share market funds showed a strong net inflow trend, with a single-day inflow of 146.186 billion yuan. Among them, institutional funds had a net inflow of 18.812 billion yuan, and small and medium-sized single funds were particularly prominent, with inflows of 39.256 billion yuan and 69.779 billion yuan, respectively, indicating a high overall market sentiment.

The aforementioned stock trader stated that small and medium-sized single funds are usually dominated by individual investors, but it does not rule out the possibility that some institutions are conducting programmed trading, breaking down institutional funds into smaller amounts to chase the market average price and buying in.

Public funds are also an important force in stock allocation. Meng Lei further stated that public funds generally tend to operate at high positions, so there is no process of adjusting the position. Looking at the new fund issuance situation, in the last week of September, the amount of new public funds issued reached about 20 billion yuan, the highest weekly level in the past two years, indicating that some retail investors have indeed started to subscribe to new funds.

It is worth noting that some media reports have indicated that the volume of bank consumer loan business has recently increased, and some investors are considering "leveraging to enter the market."

It has been learned that financial regulatory authorities have recently provided window guidance to commercial banks, requiring financial institutions to attach great importance to investor suitability management and investor protection, strengthen internal control and compliance management, and strictly control leverage. Many banking industry insiders have stated that, apart from merger and acquisition loans, bank credit funds have always been strictly prohibited from entering the stock market in violation of regulations.

Faced with the investment enthusiasm of new investors, many securities firms have begun to warn of risks. CITIC Securities issued a message to "new friends entering the market for the first time," urging new investors: "Don't rush, walk steadily." CICC Wealth Management issued a letter to buy-side investment advisors and investors, stating, "When the market takes off, it is more important to sit firmly and hold on tight."

In terms of insurance funds, Meng Lei said that, according to public information from domestic institutions, a certain insurance company's third-quarter report forecast stated that it achieved very good returns from the equity market, indirectly proving that the company did not reduce its A-share holdings in September, and may have even increased its holdings.An insurance capital insider stated that the proportion of insurance funds allocated to stocks is not too high, making it easy to be fully invested. In this market cycle, some accounts of the institution they are in are already fully invested, but the overall increase in positions is not significant, mainly due to profit realization through turnover. "I feel that now is an opportunity for institutions to adjust sectors, rather than simply increasing or decreasing positions. They can take the opportunity to switch varieties and make money to compensate for the losses in the first three quarters," the person said.

Regarding foreign capital, Meng Lei mentioned that both passive and active foreign investors are currently buying. On one hand, when A-shares and Hong Kong stocks rise, hedge funds increase their positions in pursuit of valuations. On the other hand, long-term investors, due to expectations of stimulus policies, are optimistic about the stabilization of China's real estate and the recovery of consumption, thus increasing their positions in the Chinese market.

"Those who may have missed out are some private equity institutions. Currently, the performance of some private equity has not rebounded significantly, indicating that their stock positions may not be high," said Meng Lei.

With funds from various sources entering the market, on October 8th, the Shanghai Composite Index opened up by 10.13%, at 3,674.4 points; the Shenzhen Component Index rose by 12.67%, and the ChiNext Index rose by 18.44%. Nearly a thousand stocks were bid up to their limit, and over a hundred broad-based ETFs hit their limit. On that day, A-shares were generally active, with a single-day trading volume reaching 3.48 trillion yuan, setting a historical record.

Can the Chinese stock market continue its momentum?

Regarding subsequent incremental funds, many people mentioned that the central bank's two new tools to support the capital market could inject more than 800 billion yuan of liquidity into the stock market.

In response, many professionals called for a rational view.

Li Xunlei stated that market liquidity tools such as swap facilities are a double-edged sword.

Taking SFISF as an example, in Li Xunlei's view, the biggest advantage of this tool is to enhance the market's emergency response capability. In the event of a sharp decline and liquidity risk, this policy can provide institutions with greater market support, greatly improving the efficiency of crisis response. However, no market support tool is omnipotent and still has a "double-edged sword" effect. The most significant is that it may exacerbate the market's "helping to rise and fall" effect. When the market sentiment is excited, institutions may take the opportunity to significantly increase leverage, leading to excessive market gains; and when the market falls, institutions may be unwilling to use this policy to increase positions due to pessimistic sentiment, failing to achieve the purpose of stabilizing the market.

"Such frequent large fluctuations may not be conducive to the long-term stable growth of the market and are not conducive to forming an ideal 'slow bull' market," Li Xunlei suggested, "We must improve the multi-level market system, especially to vigorously develop a professional and market-oriented institutional investor team. Among them, cultivating and strengthening the strength of long-term funds such as pension funds and insurance funds is a crucial link."At the same time, Li Xunlei stated that whether the stock market can rise in the long term is not only a matter of liquidity but also depends on the fundamentals. "Long-term capital must consider the issue of returns. Whether it can enter the market hinges on whether the governance level and profitability of listed companies can continue to improve," Li Xunlei said. He pointed out that in 2023, China's GDP (Gross Domestic Product) growth rate was 5.2%, and the profit growth rate of private enterprises exceeded 4%, while the profitability of listed companies was in negative growth during the same period, indicating that there is still room for improvement in the competitiveness of listed companies.

Guan Tao also wrote, "Only when the real economy improves, corporate operations improve, and residents' incomes increase can the foundation for the rise in the financial market be solidified." He further stated that currently, enterprises and households have a relatively heavy debt burden, and the willingness and ability to invest and consume are not strong, with the contradiction of insufficient domestic effective demand being relatively prominent. The government's counter-cyclical leverage becomes the key to expanding domestic demand.

In recent times, several well-known economists have called for increased fiscal stimulus.

Liu Shijin, former deputy director of the Development Research Center of the State Council, suggested that a comprehensive package of stimulus and reform measures should be implemented to substantially expand domestic demand. "The main method of raising funds is to issue ultra-long-term government bonds, forming an economic stimulus scale of no less than 10 trillion yuan within one to two years."

Li Xunlei suggested using central government bonds to replace local hidden debts; this year, the net increase in special government bonds or special bonds should exceed 2 trillion yuan. In the future, central fiscal spending should also continue to increase to replace hidden debts and improve people's livelihoods.

According to the State Council Information Office, a press conference will be held on the morning of October 12, where the Minister of Finance, Lan Fo'an, will introduce the situation related to "increasing the counter-cyclical adjustment strength of fiscal policy and promoting high-quality economic development" and answer questions from journalists.

The relevant news has sparked the market's speculation about a new round of fiscal stimulus measures. In this regard, Li Xunlei reminded that changes in the fiscal budget need to be approved by the Standing Committee of the National People's Congress. "Fiscal, tax, and financial policies are not just launched once and then ended. If the intensity is not enough, it can be increased later. It is expected that subsequent incremental policies will continue to be introduced, and the stock market will also continue to be active," Li Xunlei said.