Liquidity Drives Market Uptrend!
Liquidity Drives Market Uptrend!
As August came to a close, the Greater China stock market recorded its fourth consecutive month of gains. The A-share market took the lead, with the CSI 300 Index surging by 10.5%; the Taiwan Weighted Index rose by 3.2%; and the Hang Seng Index edged up by 1.3%. The MSCI China A-H Investable Market Index climbed 8.6% this month.
Abundant liquidity has been the key driver behind the market rally. The average daily turnover of the A-share market has increased from around RMB 500 billion (before September last year) to over RMB 2 trillion. The balance of clients' margin deposits has steadily risen to 4.6% of the total market capitalization of A-shares, yet it still remains below the 9.6% peak seen in 2015. In July, 1.1 million new A-share accounts were opened, representing a 71% year-on-year increase, but this figure is still significantly lower than the 3.8 million accounts opened in October 2024.
Liquidity mainly comes from bank deposits, the bond market, and part of the funds flowing back from the U.S. stock market. Currently, the one-year fixed deposit interest rate of domestic banks is below 1%. The ratio of A-share market capitalization to total household deposits is approximately 0.49 times, which is 14% lower than the 10-year historical average of 0.57 times. The 10-year government bond yield has dropped to 1.8%, and the ratio of stock market capitalization to the outstanding balance of issued bonds is about 0.42 times, a 16% discount compared to the 10-year historical average of 0.50 times. In the short term, the massive funds from the banking and bond markets will continue to drive the market upward.
As expected by the market, the China-U.S. trade truce has been extended for another 90 days. Currently, the U.S. imposes a 30% tariff on Chinese products, including a 20% tariff related to fentanyl; China levies a 10% tariff on U.S. products. We believe that tariffs related to fentanyl are expected to be lifted in the future, while non-tariff measures/countermeasures will remain in place. The Trump administration’s tariffs on the pharmaceutical and semiconductor industries are still pending. Whether the fourth round of China-U.S. economic and trade negotiations will achieve substantive progress remains to be seen.
China has continued to send signals of curbing "involution" (excessive internal competition) and cutting overcapacity. The Ministry of Industry and Information Technology (MIIT) and other relevant ministries held a symposium on the photovoltaic industry to discuss strengthening industrial regulation, promoting the orderly withdrawal of backward production capacity, curbing low-price disorderly competition, standardizing product quality, and supporting industry self-regulation. We anticipate that efforts to curb involution will focus on industries such as new energy vehicles, solar photovoltaics, coal, oil and petrochemicals, and cement. These industries are likely to take the lead in eliminating excess capacity and moving toward recovery. The reversal of the industry cycle may bring new investment opportunities.
In July, China’s economy slowed down across the board. The total retail sales of consumer goods (TRSCG) grew by 3.7% year-on-year, the lowest level so far this year. The value-added of industrial enterprises above designated size increased by 5.7% year-on-year, the lowest since November last year. From January to July this year, the growth rate of fixed asset investment slowed to 1.6%, with the contraction in the real estate industry intensifying. Deflationary pressures persist: although the consumer price index (CPI) in July was flat year-on-year, the producer price index (PPI) fell by 3.6%, marking its 34th consecutive month of contraction. In August, the Manufacturing Purchasing Managers’ Index (PMI) rose slightly from 49.3% in July to 49.4%, which was weaker than the seasonal level; the Non-Manufacturing Business Activity Index climbed from 50.1% in July to 50.3%. As the Federal Reserve has started its interest rate cut cycle, the People’s Bank of China (PBoC) may have more room for maneuver in its monetary policy.
To boost consumption, China’s Ministry of Finance announced that it will provide a 1 percentage point interest subsidy for personal consumer loans, with a cap of RMB 50,000 in consumption amount. For operating entity loans in 8 service industries—including catering and accommodation, health care, elderly care, childcare, housekeeping, cultural and entertainment, tourism, and sports—it will offer a 1 percentage point interest subsidy, with a loan cap of RMB 1 million. This measure is equivalent to a targeted 1 percentage point interest rate cut for the relevant individuals and enterprises, with the interest expenses borne by the fiscal authority. It is estimated that fiscal expenditure may reach RMB 10–30 billion, driving loan growth of RMB 1 trillion.
To stimulate housing demand, many first-tier cities across China have relaxed housing purchase restrictions. Guangzhou has fully lifted purchase restrictions; Beijing has relaxed restrictions on housing outside the Fifth Ring Road; while Shanghai has eased purchase restrictions on housing outside the Outer Ring Road, it has also stopped distinguishing between first-home and second-home commercial mortgage interest rates—for new second-home mortgages in the main urban areas and Lingang New Area, the rates will be uniformly reduced from the original 3.45% and 3.25% to 3.05% respectively. Shenzhen is expected to follow suit soon. Reports indicate that regulators plan to require some large state-owned enterprises and non-performing asset disposal institutions to help absorb excess housing inventory, thereby alleviating the financial pressure on troubled developers.
Investment Strategy
We believe that the A-share market will outperform the Hong Kong market in the second half of 2025, for the following reasons:
1. By the end of August, the Hang Seng Index had risen 27.8% year-to-date, while the CSI 300 Index had only increased by 19.6%;
2. The A/H share premium ratio has narrowed by 11.8% this year, and some H-shares now trade at a premium to their corresponding A-shares—for example, CATL (Contemporary Amperex Technology Co., Ltd.) has a 26% premium, and Hengrui Medicine has a 5% premium;
3. China’s massive pool of savings is gradually shifting from the banking and bond markets to the stock market;
4. A-shares are direct beneficiaries of the government’s large-scale equipment renewal policy and the "trade-in" policies for consumer goods and automobiles;
5. The proportion of foreign ownership in A-shares remains relatively low (below 4%).
