The Future Direction of the A-share Market: Analysis After the Epic Pump

Recently, the Chinese stock market has experienced a strong pump. The policies from financial regulatory authorities and the central high-level meetings have unexpectedly boosted market sentiment, leading to a significant rebound in the A-share and Hong Kong stock markets, outpacing global markets. However, after the National Day holiday, a pullback occurred as market sentiment became overly optimistic. So, is this rally a flash in the pan or does it signify that the market bottom has been reached? This article will analyze from three perspectives: economic fundamentals, policy environment, and the overall valuation level of the stock market.

1. Economic Fundamentals

Currently, the overall domestic economic fundamentals remain relatively weak. Although there are some signs of marginal improvement, there have not yet been any significant turning signals. During the National Day holiday, consumer activity increased year-on-year and month-on-month, but this trend has not yet been fully reflected in the main economic indicators. It is expected that in the next few quarters, with policy support, China’s economic growth may show a moderate recovery.

The manufacturing Purchasing Managers' Index (PMI) for September stood at 49.8%, an increase of 0.7 percentage points from the previous month, indicating a slight recovery in the manufacturing sector's prosperity. Meanwhile, the non-manufacturing business activity index was 50.0%, a slight decrease of 0.3 percentage points from the previous month, reflecting a slight decline in the non-manufacturing prosperity level.

In August, the profits of industrial enterprises above designated size decreased by 17.8% year-on-year, partially due to the high base from the same period last year.

In August 2023, the national Consumer Price Index (CPI) rose by 0.6% year-on-year. Among them, food prices increased by 2.8%, while non-food prices rose by 0.2%. From January to August, the average CPI increased by 0.2% year-on-year.

In August, the total retail sales of consumer goods reached 38,726 billion yuan, a year-on-year increase of 2.1%.

From the perspective of financial leading indicators, the overall financing demand in society is relatively insufficient. Since the second quarter, the year-on-year growth rate of M1 and M2 has slowed down, and the gap between the two has widened to a historical high, reflecting relatively weak demand and a certain degree of idle circulation in the financial system, hindering the transmission effect of monetary policy. This indicates that the economic fundamentals still need further improvement in the short term.

2. Policy Environment

Looking back at the characteristics of the periodic bottom of the A-share market over the past 20 years, policy signals are usually strong and need to exceed the expectations of investors at that time, which is often a key condition for the stabilization and rebound of A-shares. Recently, policies have exceeded expectations in their impact, and policy signals have already emerged.

On September 24, 2023, the central bank announced the creation of new monetary policy tools to support the stable development of the stock market. The main measures include two items:

1. Establish a swap convenience for securities, funds, and insurance companies, supporting eligible institutions to use their owned bonds, stock ETFs, and components of the CSI 300 as asset pledges to obtain liquidity from the central bank. The initial operation scale is 500 billion yuan.

2. Establish a special reloan program for stock buybacks and increases, guiding banks to provide loans to listed companies and major shareholders to support stock buybacks and increases. The initial quota is 300 billion yuan.

On September 26, relevant departments jointly issued the "Guiding Opinions on Promoting the Entry of Medium and Long-term Funds into the Market," which involves multiple aspects such as cultivating a long-term investment ecosystem, developing equity public funds and private equity funds, and improving supporting policies.

The main issues facing China's economic growth are ongoing credit contraction, deleveraging in the private sector, and the government's credit expansion failing to effectively offset these problems. The reasons for this situation include low expectations for investment returns and relatively high financing costs. The current policy changes mainly focus on reducing financing costs and boosting expectations for investment returns, making them targeted measures. However, to achieve medium to long-term sustainable re-inflation, subsequent structural fiscal stimulus and actual policy implementation are needed; otherwise, the market's recovery may be difficult to sustain.

The press conference held by the National Development and Reform Commission on October 8 failed to meet the market's expectations for a large-scale fiscal stimulus policy, which is also one of the main reasons for the market adjustment after the National Day.

3. Market Valuation

From the characteristics of previous market bottoms, whether it is the duration of the decline, the extent of the decline, or the valuation level, this round of market has already shown bottom characteristics.

As of October 9, the valuation level of A-shares has been restored to near the median. The rebound at the end of September was significant, approaching the PE level expected at the beginning of 2023 for the post-pandemic economic restart. In comparison with major global markets, the valuation of the Chinese market relative to other emerging markets is still at a relatively low level in the Asia-Pacific region, close to that of South Korea.

Conclusion

Overall, the key to a market reversal lies in the confirmation of medium-term fundamental signals. Currently, the fundamental data has not shown significant improvement, and the recent short-term pump has mainly been driven by expectations and capital. A highly volatile market is often accompanied by overreactions, and a correction following a historic surge is reasonable both technically and emotionally.

After the monetary policy takes the lead in tightening, whether the subsequent fiscal policy can follow up will be the main factor affecting the upward rhythm and space of the stock market. From a long-term perspective, the recent decline appears more like an adjustment rather than a trend ending. In the medium to long term, the A-share market may have already hit the bottom, but the main upward trend may take some time to arrive.